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Market Analysis

Fundamental Analysis: Supply Issues Boost Oil

April 09, 2019
BY Michael Stark

American light oil reached fresh five-month highs in today’s session mainly as a result of tightening supply. Violence in Libya, OPEC’s cuts, and sanctions on Iran and Venezuela have all played a role in driving the price of crude higher this week.

USOIL is currently trading at $64.53 for a barrel, the highest level since the end of October 2018. This makes oil’s gain since the end of last week nearly $3.

Libyan conflict set to disrupt supply

News coming from Libya since yesterday that fighting escalated and the eastern faction attacked Tripoli airport was positive for the price of crude. The recent collapse of negotiations in the oil-rich country threatens its exports and production. In total, Libya produces about 1% of the world’s daily oil.

OPEC’s deal is also in view for traders of crude this week. The cartel plus some non-members like Russia agreed in January to cut about 1.2 million barrels of production every day. This is also just over 1% of global output. Last month, OPEC cancelled its scheduled meeting in April.

Data has had little effect on oil this week so far, but American sanctions on Iran and Venezuela are important. New measures by the USA on Venezuela’s state oil company and its shipping has forced some users in Latin America to seek other sources of crude.

Despite all of the positives for oil recently, American production continues to rise. The USA’s Energy Information Administration expects domestic production of crude to break records this year. Based on recent data, output from the USA is increasing at a rate of about 90,000 barrels per day every month. The EIA expects that the country will become a net exporter of crude oil in 2020.

Stock data in view tonight, but OPEC rumors critical

The American Petroleum Institute will release its usual weekly stock data tonight at 20:30 GMT. The previous figure was a gain of just below 3 million: a repeat of this would be a negative factor for oil. Tomorrow afternoon at 14:30 GMT is the EIA’s regular data on inventories, with a lower gain of 2.5 million predicted.

Beyond data, the most important factors affecting sentiment on crude are ongoing events in Libya and especially news from senior members of OPEC. Any comments from the Russian and Saudi energy ministers are likely to be studied very closely by traders. Speculators want to determine the likelihood of the cartel extending the current cuts beyond June.

Fundamentals support overbought oil

Fundamental drivers of the price of oil remain highly positive. However, traders should not ignore the technical picture. American light crude is strongly overbought on the higher timeframes, with stochastics close to maximum. This means that any further gains for oil are likely to be limited in the near future.

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