Context: Oil prices had their longest run of gains in seven year, going up more than 11% in 8 sessions.

1 month target: $40 (Brent)

  • (1) Fundamentals are still bad
  • (2) Technicals 
  • (3) Price Action
  • (4) Sentiment 
  • (5) Risks 

(1) Fundamentals are still bad

  • Supply 

OPEC

OPEC output rose by 260,000 barrels a day to 32.55 million in June, according to the Bloomberg News survey. Half of the increase came from Libya and Nigeria while Saudi Arabia boosted production by 90,000 barrels a day.

OPEC has little incentive (and often very few capabilities) to keep cutting production. OPEC countries pump like mad to make up for the revenue loss.

US

Everybody out there in the shale pitch had tried to hedge as much as possible as far out as possible. Now, the net effect is, that those guys stay afloat longer and keep drilling – which means continued and growing supply from the USA.

  • Demand 

We are beyond the peak refinery demand season for oil.

  • Inventories 

U.S. crude inventories remain more than 100 million barrels above the five-year average.

 


(2) Technicals 

Same pattern as in May and April, strong rise and then strong fall with new lows.


(3) Price Action

Fundamental reasons behind the rally: The current rally (+12%) was driven by a fall in 2 rigs in the number of active rigs in the US. It concluded the US shale run of 23 weeks of steady gains. The decrease comes as oil prices were on track to record their worst first-half performance since H1 1998.

We witnessed a short Squeeze

This giant run is more or less a short squeeze. CoT data shows a lot of suckers are stuck short down there. Fundamentals remain the same; oil will head back to low 40s and break it soon enough.

 


(4) Sentiment 

Contrarian stand: when everyone is buying and price is high: sell. Looking back at what has happened when long positions have spiked in the past: Each time they push sharply upwards there is a drop in price immediately afterward

 


(5) Risks 

  • New “political” declaration from OPEC

Will mechanically drive price up. Saudis want oil goes up to $70-$80 very quickly to get the Aramco IPO done and collect $150-200 B dollars. Plus they want to sell more gov bonds

  •  USD

Could head lower after the huge increase post-Trump election, and this could be a tailwind for oil prices.

  • Geopolitical event

See my analysis of a potential price surge related to this matter: A Geopolitical Approach to Oil Trading – Why Oil Prices Could Soar in 2017