Marius Paun | London, UK | Senior dealer | Wednesday, 13th November 2019
If anyone needed stone-cold proof that crude is out of fashion at the moment, they only need to look at the market’s reaction to last week’s oil news.
Last Monday on the 4th of November, in the United Arab Emirates, the Supreme Petroleum Council announced the discovery of new hydrocarbon reserves estimated at 7 billion barrels of crude and 58 trillion standard cubic feet of conventional gas. The find is in the category of ‘elephant size’ bringing the UAE’s total reserves to over 100 billion barrels of crude and over 270 trillion cubic feet of conventional gas.
In order to understand the size of this find in context, we can compare it with other oil fields. The biggest one, Ghawar in Saudi Arabia has some 90-100 billion barrels of reserves and the second one, Burgan in Kuwait also has around 70 billion barrels of oil. But have a look at the rest of the top 20 oil fields and most of the oil fields have between 15 and 30 billion barrels of reserves. So, the discovery was big enough to move the country one place up from the seventh to sixth place in terms of oil and gas reserves.
Following the announcement, one could expect the crude price to spark a sell-off. But it did not, if anything it went up a little and by and large it has been trading sideways ever since.
Looking at global oil consumption, we currently use around 100 million barrels per day. We also know that world demand amounted to about 85 million barrels per day in 2009, so oil consumption rose by around 17%-18% in the last decade. Given all the noise around the trend to alternative energy, subsidies going into renewables and the whole political pressure to switch from fossil fuels to green energy by 2030 or so, you might expect oil consumption to have fallen. But that is not the case, at least not yet, and data continues to show rising demand in crude almost every year.
On a side note, the US government data showed last Tuesday that for the first time since 1978, the US recorded a $252 million surplus in oil trade. The value of US crude exports was just under $15 billion while imports were $14.7 billion. So where does this leave the much-trumpeted Saudi Aramco IPO-initial public offering?
The world’s biggest oil and gas company has finally decided to go public, sometime in December. Gulf news reports that Crown Prince Mohammed bin Salman said he wants a $2 trillion valuation, thus looking to raise funds to diversify the Saudi economy away from oil by investing in non-energy industries especially high tech. Saudi Arabia hopes to float only 3% of Aramco and as a result to raise $60 billion.
Now if the history is anything to go by when Glencore went public in 2011 it marked the top of the commodities cycle. Additionally, when Barclays and RBS both went after ABN Amro in 2007 it marked the peak of the banking bubble. Ironically the winner (RBS) of that deal proved to be the big loser in the end as the extra debt came back to haunt them. The conclusion is that only irrational exuberance associated with the market top can convince investors to back such a massive deal.
But as we showed in the beginning, this IPO seems unusual in that it is being proposed when crude prices are nowhere near their record highs; in fact, quite the opposite. So that makes the process look like an IPO done out of necessity. So, if this is not the top of the crude market, could it be the bottom? Only time will tell but last week US oil drillers cut an extra seven oil rigs bringing the total countdown of operational rigs down to 684, the lowest since April 2017.
It is widely argued that lingering uncertainty over US-China trade relations is keeping a lid on oil prices. Last Friday brought renewed concerns as President Trump downplayed reports of an imminent lift of tariffs as part of a ‘phase one’ agreement. That rumour had originally boosted markets during the previous few sessions. However, the constant back and forth on the trade disputes seems to be trumping any other fundamental news.
Below is the price of US crude oil prices over more three years. It’s currently around $57.40 a barrel.
We can see two strong areas of support around $42.50 and more recently from June this year to October it held its ground just below $51.00 support base. The latter also matches 23.6% Fibonacci retracement from a high of $76.79 seen on 30th of September 2018 and a low of $42.42 touched on 23rd of December last year. So, while crude enjoyed a rebound since September, on a medium-term basis is still on a downtrend trajectory.
Immediate support is seen around $56.00 mark which during the current year shifted between support and resistance quite a few times. Further down $54.50 and $53 are also levels to watch.
On the way up, resistance around 58.50 level will be the next target followed by the 50% Fibonacci retracement at $59.65. Bulls will then keep an eye for $62.5 to $63.00 area. But only a break above the $66.55 mark, the high of 23of April this year will convincingly change the medium-term outlook to sideways.
The short-term moving averages (9 MA) seems to be on course to cross above the longer-term one (21 MA) which should be encouraging for the bulls.