Oil price discussion and analysis

Smurf1976 said:

Or am I completely misunderstanding how this pattern's supposed to work?

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Please read my post again, noting the times of the head and shoulders; these were all within the last two months.

Sdajii said:

Please read my post again, noting the times of the head and shoulders; these were all within the last two months.

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That is true but that seems to have already played out and whilst looking at oil on a chart the far from perfectly formed but much larger one is also apparent especially on a monthly chart so I've drawn attention to it.

Or in other words, there's the short term one you've mentioned and there seems to be a possible longer term one too albeit incomplete at present. I could of course be wrong but on a monthly chart this is what I see:

Smurf1976 said:

That is true but that seems to have already played out and whilst looking at oil on a chart the far from perfectly formed but much larger one is also apparent especially on a monthly chart so I've drawn attention to it.

Or in other words, there's the short term one you've mentioned and there seems to be a possible longer term one too albeit incomplete at present. I could of course be wrong but on a monthly chart this is what I see:

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Yep, it (the recent one I was talking about) does seem to have completed, and now we seem to be seeing a recovery (predicting the nature of that recovery and how long it will last is a fun gave for anyone wanting to have a go!).

The one you're talking about is a completely different one, and I'm a little dubious about such long term patterns, but yes, if we see a drop to around $45 before the end of the year with a few other conditions met, it does seem possible that your pattern may play out, and if it does, there should be a moderate drop.Between the timeframe and the left shoulder not being that much of a shoulder, I'm not convinced it will play out. The right shoulder is significantly higher than the left, so even if it does play out we wouldn't expect a dramatic result. Interesting pattern to look at all the same, and yes, if the necessary conditions are met and we do see a drop below $45 I would expect to see it fall at least a little bit lower.

Thoughts on the WTI chart? Bars are weekly, shorter line with steeper gradient goes back to April, the longer one goes back to September 2018.

Personally I think $50 should hold as support, and if not, I don't think we'll go below the low 40s. According to the chart we should test $50 within 3 months and $42.50 within about 6 months (I'm going by the gradient of the shorter trendline, but if you use the other it stretches out further).

What would be expect to happen when this line is broken? (or is the line valid at all?)

Sdajii said:

and if not, I don't think we'll go below the low 40s.

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Rationally I agree and I wouldn't be surprised if we ended up with a double bottom, so basically the same low as last time or very close to it.

Pragmatically though the international political situation could change dramatically at any time and oil is very caught up in that.

One one hand there's supply from the Middle East and the potential for disruption.

On the other there's demand from China in particular and of course the rest of the world too. If the economy slows, so does oil demand.

Then there's stockpiles in particular those in the USA. If the US President wanted to flood the world market and crash the price then he could do so simply by ordering a release of the stocks.

All that political stuff does make me wary of looking at it based on either what I'll call "normal" fundamentals or technicals since it only needs one missile or one presidential order and everything changes just like that.

Other commodities in general are at least somewhat less exposed to politics. Not totally immune but less directly tied up in it than oil.

Smurf1976 said:

Rationally I agree and I wouldn't be surprised if we ended up with a double bottom, so basically the same low as last time or very close to it.

Pragmatically though the international political situation could change dramatically at any time and oil is very caught up in that.

One one hand there's supply from the Middle East and the potential for disruption.

On the other there's demand from China in particular and of course the rest of the world too. If the economy slows, so does oil demand.

Then there's stockpiles in particular those in the USA. If the US President wanted to flood the world market and crash the price then he could do so simply by ordering a release of the stocks.

All that political stuff does make me wary of looking at it based on either what I'll call "normal" fundamentals or technicals since it only needs one missile or one presidential order and everything changes just like that.

Other commodities in general are at least somewhat less exposed to politics. Not totally immune but less directly tied up in it than oil.

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100% I agree with you here.

Obviously if Trump orders a strike on Iran or Saudi Arabia has a bloody revolution or whoever decides to blow up a tanker in Hormuz, the technicals go out the window, and I should have pointed out that my post only applies in the scenario of nothing like this happening. I really don't think Trump is going to flood the market using the US strategic reserves in a way which would crash prices. It would be a crazy move, it wouldn't be helpful, and he would get negative press with no benefit.

Do you think the chart that we see is like it is entirely by coincidence or do you think technicals do play a part?

Sdajii said:

Do you think the chart that we see is like it is entirely by coincidence or do you think technicals do play a part?

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I think technicals are valid certainly. I wouldn't be the best person to forecast based upon it but it's a valid concept under normal circumstances definitely.

For the politics, I agree it's unlikely that Trump decides to flood the market etc but I'm conscious that we're living in an era where what seemed unthinkable not too long ago now routinely happens. Australia's revolving door of Prime Ministers, Brexit and Trump being President - practically nobody would have picked any of those a decade ago, they all seemed too far fetched for anyone to even be thinking about the concept and yet here we are.

That being so I'm factoring that risk into my thinking especially with things like oil. However unlikely any scenario seems, we're living in a time when what seems unthinkable could well happen and of all commodities oil seems the most exposed there.

Smurf1976 said:

I think technicals are valid certainly. I wouldn't be the best person to forecast based upon it but it's a valid concept under normal circumstances definitely.

For the politics, I agree it's unlikely that Trump decides to flood the market etc but I'm conscious that we're living in an era where what seemed unthinkable not too long ago now routinely happens. Australia's revolving door of Prime Ministers, Brexit and Trump being President - practically nobody would have picked any of those a decade ago, they all seemed too far fetched for anyone to even be thinking about the concept and yet here we are.

That being so I'm factoring that risk into my thinking especially with things like oil. However unlikely any scenario seems, we're living in a time when what seems unthinkable could well happen and of all commodities oil seems the most exposed there.

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The world is becoming insane in many ways, but I don't really find Australian PMs playing musical chairs, Brexit or President Trump to be either particularly surprising or with the exception of Trump particularly relevant to specific dramatic events effecting the oil price. What do ephemeral Australian PM terms have to do with WTI prices? That's an Australia-specific issue. Does Brexit really change that much? Trump is clearly having an effect through the tariff war with China and keeping the US economy afloat etc, but just because you find these things surprising (I don't find any of these three things particularly surprising, there was talk about Trump becoming president well before 10 years ago, and the day he announced he was running I confidently said he was going to win, I thought it was quite obvious (some people of course said I was crazy). The whole EU situation is insane and many people thought so from the start, and countries wanting to leave don't surprise me. I think a lot of why people are surprised by things these days is that despite them not being particularly surprising, the media has become so dishonest and tells people that things won't happen or are/were unlikely or crazy, not because it's true but because they want people to think it. If the media hadn't told people Trump would never be president and it couldn't possibly happen, I don't think it would have surprised anyone. 15-20 years ago I don't think it would have been surprising to people at all if they found out he would be a future president, because the media portrayed him as a successful and likeable person. Most people liked and respected him right up until the media told us not to, starting from the day he announced he was running for president. I don't find it surprising that a country being told to do things which are not in its best interests wants to leave the thing telling it those things. I found the formation of the EU surprising, it seemed like a bad idea, but I was young enough to assume that I just didn't understand the situation properly. Every day it seems worse and worse, although the media tells us otherwise (which if anything should confirm in our minds that it's terrible!).

Regardless, even if you think these things were difficult to see coming, this doesn't mean we can just pick random hypotheticals and say that everything is a reasonable likelihood now, or that all hypotheticals have equal likelihoods. Trump isn't the complete lunatic the mainstream media tries (successfully with half the world) to tell everyone he is. He does sometimes say stupid things without thinking, but he doesn't just flippantly make major tangible moves. I can't see any tangible reason to think Trump would use the strategic oil reserves in any scenario other than an emergency shortage, in which case oil prices are going to be sky high. Hypothetically anything is possible, he could hypothetically nuke Beijing tomorrow or declare himself dictator or invade Australia, but we can still reasonably assume that these are extraordinarily unlikely things with effectively zero chance of happening. We can still rank future potential events on a basis of probability with some level of confidence. I think the chance of Trump using the strategic oil reserves to lower prices in any scenario not involving high WTI prices are low enough to assume it's not going to happen. So, if he does release strategic reserves we can safely assume oil prices are going to be high.

Sdajii said:

Hypothetically anything is possible, he could hypothetically nuke Beijing tomorrow or declare himself dictator or invade Australia, but we can still reasonably assume that these are extraordinarily unlikely things with effectively zero chance of happening.

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My point is not about the detail but about the reality that oil is very heavily influenced by politics and that politics itself has turned on its head, with the "unthinkable" now happening routinely in all sorts of areas.

Oil is a commodity where the biggest producer is government owned, the listed "big oil" companies being relative minnows in comparison in terms of crude oil production, and where governments and a very visible cartel collectively control most oil reserves, a decent chunk of global production, virtually all spare production capacity and a rather large stockpile.

That's a dynamic that's very different to other commodities so whilst I do see that technical analysis or normal means of fundamental analysis are valid, we should bear in mind that oil isn't actually a free market on the supply side given the involvement of governments and a cartel whose motives aren't necessarily limited to financial profit.

I'm not aiming to predict the outcome but I'm consciously aware of the risk.

Saudi Oil refineries have been attacked by drones. Huge fires. How much damage, how much impact on global oil supplies yet to be determined but one would think there would be fallout. Too early yet to see how the oil price will go but I think there could be a very sharp spike when the markets reopen.

Also of course the fact that one drone attack has been successful suggests the risk of further attacks. Also raises the risks of expanding wars and economic crises either in Saudi Arabia or countries affected by increasing oil prices.

Saudi Arabia's largest oil processing facility on fire after drone attacks
Updated about an hour ago



Video: Drone attack in Saudi Arabia causes fire at an Aramco factory in Abqaiq (ABC News)
Related Story: Saudi-led strike hits Yemen prison, killing more than 100 people
Related Story: Drone drops bombs on Yemen military parade, killing at least six people
Related Story: Australian defence company denies weapons system being used in the Yemen war
Drone attacks have struck the world's largest oil processing facility in Saudi Arabia as well as an oilfield operated by Saudi Aramco, sparking huge fires at a processor crucial to global energy supplies.

https://www.abc.net.au/news/2019-09...-arabia-biggest-oil-facilities-fires/11513728

And there I was thinking only yesterday that the wedge in the oil price would have to break one way or the other pretty soon.

Abqaiq, one of the facilities reported to be on fire, processes around 7 million barrels per day when running at full capacity to my understanding. Suffice to say that's substantially more than spare capacity at all other facilities globally.

If it's substantially damaged then the world has a crisis yes. Need to get the Iran issue sorted ASAP and the oil flowing again, same with Venezuela, otherwise it's a price shock and recession here we come.

Off topic random thought: DRO

HelloU said:

Off topic random thought: DRO

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DRO??? Sorry for my ignorance

qldfrog said:

DRO??? Sorry for my ignorance

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I assume a reference to Drone Shield (ASX: DRO).

Ok, thanks makes perfect sense, i just thought i was missing something due to my non English speaking background

Drone strikes on the heart of the Saudi oil industry forced the kingdom to shut down half its crude production on Saturday, amounting to a loss of about 5M barrels a day, or roughly 5% of the world's daily production of crude oil, WSJ reports.

Yemen's Iranian-aligned Houthi rebels claimed credit for the attack, saying they sent 10 drones to strike at important Aramco (ARMCO) facilities, including the world's largest oil processing plant and a major oil field.

Crude prices will be on watch when trading reopens on Sunday evening.

You would expect a jump higher. Petrol prices to follow.

jog on
duc

HelloU said:

Off topic random thought: DRO

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Before someone misunderstands - that was tongue in cheek (but I do expect DRO to pip on open tomoz).

I have not read the articles and do not know if we are talking 'drones' or 'Unmanned Aerial Vehicles'. There is a difference between the two, and that would be important information if making investment decisions.

Given the media reported a "drone attack" DRO should spike on open tomorrow, traders love these kinds of news releases, they provide an opportunity to pump and then dump.
Oil should spike too, I'll be buying oilers early, but wont chase the price action very far because I don't want to get caught buying at the peak.

Some assorted comments and thoughts on the situation in Saudi at present:

Firstly, the Abqaiq facility is primarily an oil stabilisation plant.

In layman's terms when crude oil comes out of the ground is is not ready to be refined and contains an assortment of problematic materials, in particular

Water.

Grit, sand etc.

Hydrogen sulphide. This is a seriously nasty gas in quite a few ways. First because it's toxic to humans in relatively low concentration. Second because it outright stinks in even trace amounts. Third because in the presence of water it forms sulphuric acid which rusts the absolute crap out of, among other things, oil storage tanks, pipelines and refineries. So removing the hydrogen sulphide is critical before the oil can be processed further.

Methane, ethane, propane and butane are also present with the oil. They need to be removed since having them present creates a high vapour pressure and associated major fire / explosion hazard. Plus they're useful gases (methane is natural gas, ethane is a petrochemical feedstock, propane and butane are LPG) so it's preferable to not have them simply bubbling out of the oil and going to waste.

Now enough of the chemistry lesson and looking at the market, it's a bit more complex than it seems at first:

Media reports range from 5 to 5.7 million barrels of oil production per day has been stopped. I'll take it as 5 million from here since nobody seems to be saying it's less than that and it's an easy round number.

Now it is also reported that around 50% of Saudi LPG production has been disrupted. The energy content of this is equivalent to about 300,000 barrels of oil per day noting that using other liquids derived from oil is the main substitute for LPG in practice.

There's also a substantial disruption to natural gas production reported and this is the one with a bigger impact. In the Saudi context, natural gas is primarily an alternative to the use of crude oil or fuel oil as fuel, particularly for power generation, and the Saudis already burn all the gas they can manage to produce and that's still not enough (that is, they routinely burn crude oil in power stations under normal circumstances). To cut a long story short, the oil equivalent of the lost gas production amounts to about 900,000 barrels per day. If the Saudis keep their industries running, apart from oil obviously, then without the gas we can expect to see them burn 900,000 barrels of additional oil per day mostly in power stations but also other factories and so on.

Adding this up:

Saudi oil production before the attack = 10 million barrels per day
Saudi internal oil consumption before the attack = 3 million barrels per day
Exports before the attack = 7 million barrels per day

Oil production after the attack = 5 million barrels per day
Saudi oil consumption after the attack if oil is used to replace lost gas production in full = close to 4 million barrels per day.
Exports after the attack = 1 million barrels per day.

So my point is that it's a 50% drop in oil production yes but allowing for internal use it's a far greater % cut in exports and that's what matters so far as the rest of the world is concerned.

Estimates of spare production capacity around the world vary but they're all very much less than the 5 - 7 million barrel per day total impact (depending on which figures you use and what assumptions are made about keeping the lights on in Saudi) of the attacks. Even if we take the bottom of that range, just the 5 mmbpd lost and ignoring what the Saudis themselves do about the lack of associated gas production, then that's still a big impact.

Note that I'm not predicting that your local service station will be out of fuel by this time tomorrow but this is going to have a significant market impact most certainly. The question is thus about what happens next?

How long will the outage be?

Will there be further attacks?

To what extent will Saudi and/or other OPEC members release whatever stockpiles they have?

To what extent will IEA member countries release stocks?

In the case of the latter, if the IEA does act, what happens with regard to the one member that's known to be swimming naked and doesn't actually have the stockpile it agreed to have? That country being Australia. Buying from the USA, at whatever price they ask which likely won't be a purely financial one, is plausibly Australia's only option to retain compliance with the agreement.

This could all get interesting.....

Smurf1976 said:

Some assorted comments and thoughts on the situation in Saudi at present:....

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There may be a market price reaction to the attacks, but unless the damage has been substantial, which to date appears not to be the case, then global oil reserves will be more than adequate to make up the temporary shortfall.
If the Saudis have sugar coated the situation then I am with you smurf, and will sell some of my BPT shares at $3 each .