FUNDAMENTAL ANALYSIS
FX
anticipates a decline in price of an asset. In essence, U.S. oil producers are betting against themselves. U.S. producers will profit from the agreed prices with midstream companies and from the short positions on the financial market. Regardless if the oil prices rise or fall, U.S. producers will profit.
Chart 1.
Speculation should move the price of Brent and WTI up to $52 and $47 a barrel respectively. At which U.S. producers have an opportunity to
lock in profits and increase
production. Saudi Arabia, Iran and Russia not wanting to lose market share will maintain their current quotes to remain competitive. This will push the price of Brent and WTI down to the $30 a barrel towards the end of July.
The struggle for market Chart 2.
U.S. Whereas oil operations in the Middle East and Russia are fully integrated, the areas of upstream (oil extraction), midstream (oil transportation on ship, truck or through pipeline) and downstream (refining oil into gasoline, heating oil and other products) are one system controlled by the state. In the U.S. each area is a separate entity, where upstream operations sign contracts with midstream companies to lock in prices. Currently, U.S. shale producers are in desperate need of
revenue to pay off debts incurred to survive the low price environment. An oil price above $40 a barrel is profitable for the competitive producers on the market. Once they have locked in prices with midstream operators, they can increase production. However, this is a short term solution to generate revenue, but results in the price of oil declining to unprofitable levels. To counter this, producers have been amassing short positions. An individual taking a short position
share
between OPEC and non-OPEC producers has driven the price of oil down to multi-decade lows. U.S. shale producers are using technology and the financial markets to ensure they outlast larger state operators. Oil producing nations will continue to oversupply the market until they have achieved their objectives. The prospect of a production cut between these nations is remote. The result will see Brent and WTI move lower through the second and third quarter of the year.
Michael Stapleton
Crude Oil Market Analyst Oil Pips
FX TRADER MAGAZINE April - June 2016 29
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