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| 13 August, 2017

The last stretch - what next for oil in Q4?

Hussein Al Sayed is the Chief Market Strategist for the Gulf and Middle East region at FXTM, and host of the popular evening business show on CNBC Arabia, Bursat Al Alam. Prior to his current role, Hussein spent many years working in the finance sector as a dealer, trader and analyst in equities, credit and foreign exchange markets. He holds a BA degree in Banking and Finance from the Lebanese International University and is experienced in both technical and fundamental analysis.

Website: http://fxtm.co/1XgYw2A

With a subdued Summer trading season fading, all eyes are on the oil price during the last stretch of the year


13 August 2017

With a subdued Summer trading season fading, all eyes are on the oil price during the last stretch of the year. The fourth quarter may provide surprises and volatility for risk-tolerant investors, but the chances are that the relative stasis seen in Summer is likely to persist through to the end of the quarter. Oil is in the grip of a stalemate. In the OPEC vs US Shale chess game, the oil price is the king with few moves to make.

OPEC's August meeting produced more reassurances of compliance with production cuts. The markets weren't convinced though, especially in the face of contradicting data showing a rise in OPEC's output. During the event, Brent did a quick slide to just under $52 per barrel from close to $53 per barrel. The climb back over the $52 mark was based on the American Petroleum Institute's report for the week ending 4 August. Inventories fell by 7.8 million barrels versus the expected 2.3 million barrels, galvanising a small price hike. The step up was supported by speculation ahead of the EIA's release for the week ending 4 August. The markets expected a draw of 2.7 million barrels. The actual result was the higher-than-expected figure of 6.4 million barrels. By and large, however, the change in crude oil inventories was already priced in.

In short, the abundance of oil supplies is a long way from being over. That's not to say that I expect significant falls in the oil price before the end of the year. Based on fundamentals, it appears that the price has already bottomed out for 2017. Brent could continue trading between $50-$60 for the next four months. As long as the oversupply persists, the price is likely to stay biased towards the bearish side. 

Having said that, factors other than supply and demand are also significant through the end of the year. The situation in Venezuela is a concern as it escalates instead of subsiding. The markets are keeping a weather eye on the political instability there. There are multiple knock-on factors affecting Venezuela's economy. A looming national debt default, an indebted oil industry and possible US oil sanctions are spooking investors - with good reason. Military mutinies and attacks on oil fields possibly leading to a coup d’état are adding to the volatile situation.  

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In the GCC, the slow-burning fuse on the Qatar crisis is still lit. Qatar is the smallest OPEC country, but the rift is a disturbing factor in the supply-cut deal. As a geopolitical risk to the OPEC deal, it adds to the Venezuela weakness and Nigeria's increasing output. It also adds weight to the argument for the oversupply lasting until the end of the year.

In other political risks, the question raises its ugly head; could the fourth quarter be the time when U.S. President Donald Trump pushes forward on his protectionism? This was to take the form of high tariffs on oil imports and continuing strong production by U.S. Shale. So far, the tariffs haven’t materialised, but that’s not to say that they’ve been ruled out completely. U.S. Shale, on the other hand, has steadily increased its output and shows no signs of pulling back. 

As we enter the last stretch of 2017 – and a range-bound oil price – the trading markets are set to pick up as everyone gets back to work. The focus remains sharply on OPEC, U.S. Shale, and the supply issues. The bulls will be pushing strongly towards $60, at the very least for profit-taking purposes. The bears will keep circling $50, so barring a black swan event triggering massive volatility, this is the course we’re likely to see in Q4.

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