Oil higher ahead of OPEC decision

<p>Crude prices jumped in reaction to the latest weekly US crude stockpiles data but then quickly went into reverse gear, before bouncing back once again. […]</p>

Crude prices jumped in reaction to the latest weekly US crude stockpiles data but then quickly went into reverse gear, before bouncing back once again. Traders were in no mood to take any chances ahead of the conclusion of talks between the OPEC and non-OPEC members in Algeria, especially given how headline-driven prices have become. At the time of this writing, Brent was trading at $46.65 and WTI at $45.20 a barrel, both holding onto small gains for the day.

The official government data more or less confirmed the surprise drawdown in US crude inventories as had been reported by the American Petroleum Institute (API) on Tuesday evening. According to the Energy Information Administration (EIA), crude inventories fell by a good 1.9 million barrels in the week to September 23. Oil inventories were therefore down the fourth consecutive week, contrary to analyst expectations who on average had envisaged a build of 2.4 million barrels. The API had reported a slightly smaller draw of 800,000 barrels on Tuesday. So, the headline figure was a positive surprise.

However contrary to the API data, the EIA reported that crude oil stocks at Cushing, a key delivery hub for WTI crude, increased by 600,000 barrels rather than decrease by 800,000 barrels. What’s more, gasoline stocks fell by only 770,000 barrels rather than 3.7 million. So, relative to the API data, the EIA’s report was not as bullish as the headline inventory number suggested which may also help explain why oil was unable to hold on to its initial gains.

With regards to the meeting of oil producers in Algeria, the general feeling is that an agreement to cut or freeze oil production is looking increasingly unlikely as the International Energy Forum draws to a close. However it is surprising to see oil prices remain fairly stable at the moment, which suggests that the market is warming to the idea that a deal could potentially be signed in the OPEC’s November meeting as long as there is a general agreement in place today about a production cut/freeze. Iran is pushing for more market share as it tries to reach its pre-sanction levels while Saudi is willing to cut its output now, knowing that it has probably reached peak capacity and ahead of lower seasonal demand in the final months of the year. But unlike earlier in the year, Iran is a lot closer to its 4 million barrel per day target, so there is an increased probability that the OPEC may be able to reach an agreement either today or more likely in November.

If and when an agreement is reached, I would expect oil prices to stage a sharp relief rally. However there is also scope for disappointment, which could see oil prices drop in a knee-jerk, algo-driven, reaction. Both oil contracts are effectively in consolidation mode as prices bounce off the converging trend lines. The technical outlook should become clearer when oil prices eventually breakout of their consolidative ranges. See the charts, below for details.

16-09-28-wti 16-09-28-brent

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