12th January - What happened to the Oil rally?
16 January 2017
TECHNICALS:
Monthly futures continuation chart
Chartists were not surprised when the Oil market rallied from the support from the Prior High in the year 2000 at the $37.12 level because the market had bounced from there before in early 2009.
Sure it traded below but the monthly closes were never far below that level.
WEEKLY OIL FUTURES CONTINUATION CHART
There was added chartist excitement when the market created a bull triangle over the summer of 2016 that completed in December.
The measured move of a Triangle is the depth of the first retracement projected above the breakout level. In this case that suggests a minimum move up as far as $67 or so....
Though the market has ranged sideways for five weeks, the top of the Triangle around $52 is good support and while that holds, the bulls should remain confident.
FUNDAMENTALS:
The recent rally in oil has been driven by two linked factors:
First, talk over a period of months that OPEC together with non-OPEC oil producers would agree to cut production.
Second, the subsequent agreement between OPEC and non-OPEC members before the end of 2016 that they would actually cut production.
So why has the rally stalled ?
Although the oil producers of OPEC and non-OPEC (mainly Russia) agreed to cut output, the cartel has a long history of its members cheating and continuing to pump more than their share.
Additionally, they are no longer the only game in town.
Over recent years the US has re-emerged as a major oil producer as a result of its shale production. Just before the oil price collapsed the US was set to become the world’s largest producer. Until recently the Saudis had adopted a policy of allowing the oil price to collapse as they sought to drive US shale producers out of business, but they failed.
Yet shale oil production is more expensive than traditional oil production. So every Dollar the oil price rises, shale oil becomes increasingly more economic to produce. Add in the fact that Oil companies that shelved new exploration projects when the oil price collapsed, are now starting to seek new oil reserves again now the oil price has risen. And also that the US has put more oil rigs back into traditional production. So the efforts of OPEC to drive the oil price higher are starting to look to have been in vain.
The US is not the only country with shale oil and gas reserves. These are found in many other countries and as they seek to ween themselves off supplies from the Middle East and Russia who use energy as a political tool in the case of Russia and a cash cow in the case of OPEC. So those reserves will increasingly be exploited.
We judge the forces driving the oil market are balanced around the current price. If oil rallies much further, then shale oil production especially in the US will be ramped up acting as a de facto cap. So there is some doubt whether OPEC and the non-OPEC producers will cut production further.
Saudi Arabia clearly needs a higher oil price. It is to launch an IPO in the state-owned oil company to plug a budget deficit, and is even considering selling government bonds, something that would have been unheard until recently.
As for Russia, her economy relies almost entirely on oil revenue, so unless production cuts work, will she be tempted to pump more oil? Clearly the recent modernisation of Russia’s armed forces has been financed by oil revenues, that is now proving a strain.
In summary, we judge the oil price will struggle to break through $60 any time soon, but similarly we think $40 will act as a floor, since a price lower than that works against the economics of shale oil production.
Oil could be stuck at current levels for some time to come.
Next story:
23rd January- Ignore the short term wobbles, FTSE has huge potential 
Previous story:
4th January - Cable looks vulnerable