COMMODITIES FX point to ponder this coming year.
What about Saudi Arabia? Trump has come out stating that the U.S. should become energy independent and not import Saudi crude. Tis
is highly
unlikely for two reasons. Firstly, the largest share of oil imports to the U.S. comes from Canada (41%) followed by OPEC members (31%). Denying Saudi is indirectly putting a halt to all OPEC nations. At least in theory. Tis would be detrimental for the U.S. economy. Secondly, Saudi Arabia through Aramco own downstream assets (refineries) in the U.S. If relations were to deteriorate rapidly, Saudi could create a bottleneck in U.S. refinement. Regardless if a Trump presidency takes a more aggressive stance towards diplomacy or maintains the status quo. Uncertainty creates volatility in the market. Aside from the political question mark, what about U.S. shale?
It has also accelerated with the price of West Texas Intermediate (WTI) trading above $50 a barrel. Tis tells me that at $50 there are a number of producers ready to increase production.
Te thought of further production cuts from OPEC and non-OPEC producers will be great opportunities to go long. Simply buying into the rumours and headlines will be enough to make profitable
Conversely,
trades. if
there is any lack of commitment from key
producers
It is possible that through Putin, Trump will enforce a hard line policy on China to settle disputes with neighbours in the Southeast Asia region
Te U.S. has established itself as a swing producer through the phenomenal growth and develop of tight oil production. I am paying close attention to the weekly release of the Baker Hughes rig count. Te number of operational rigs has been consistently increasing since the summer of 2016.
I must point out that this is not the case for all Petroleum Administration for Defence Districts (PADDs). Te stand- out has been the Permian Basin (PAD 3), which produces just over 2 million barrels per day (bpd) of the 8.5 million bpd the U.S. produces as of December 2016. As the price rises towards $60 we will encounter the same ceiling as 2015. PADDs that are battling at $50 will be sustainable at $60 and increase production. Te battle between OPEC, non-OPEC and U.S. shale will continue through 2017. It will require further production cuts to keep the market above $60. What trading opportunities am I looking for next year?
like Saudi Arabia or Russia, short bearish sentiment. Te longer term f u n d amen ta l picture is a copy of 2015. Te range between $45 and $50 is a buy and hold up to $60. Te trade from $60 is dependent on further
action
by OPEC and the strength of U.S. production.
Further OPEC cuts will be a buy and hold to see where the market runs out of momentum. If OPEC fails to take further action and U.S. production climbs above 9 million bpd. A short at $60 could be a held down to $50. Look to trade the psychological levels at $50 and $60. Buying or selling at these levels will depend on OPEC’s production reduction commitment, Trump’s
influence on oil producing
nations and the potential increase of shale oil.
Michael Stapleton
Crude Oil Market Analyst Oil Pips
FX TRADER MAGAZINE January - March 2017 63
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