Market prices often move in the opposite direction of the expected impact of breaking news. This is usually the case when the breaking news is not only expected but fully discounted into current prices. An old saying is to “buy on the rumor. Sell on the news.” and on the other side , to “sell on the rumor. Buy on the news”. The logic is that faster traders have already anticipated how the news would impact the markets and have already taken positions in order to sell to slower traders when the news is finally announced.
Oil traders had been expecting The Organization of Petroleum Exporting Countries (OPEC) to announce production increases which would depress crude oil prices in the futures markets. After a week of tense negotiation in Vienna, Austria, OPEC was expected to make an announcement on Friday regarding production quotas for member countries over the next six months. Over the past eighteen months, the cartel had agreed to cut production in order to support oil prices. And the production cuts were supposed to extend to the end of 2018.
Iran has been a staunch opponent of production increases, since they need to keep the price of oil high enough to offset some of the country’s finances from US imposed sanctions. Iraq and Venezuela also opposed the proposed increases. But Iran’s nemesis, Saudi Arabia, which is OPEC’s biggest producer, has been advocating for an increase of one million barrels per day. So have Russia and the US, who are not OPEC members, but are the world’s largest oil producers, along with Saudi Arabia. On Friday, US President Donald Trump tweeted ahead of the scheduled press conference for OPEC members to help “keep prices down”.
Since May 22nd, crude oil futures had declined from 72.90 to a low of 63.40 a few days before the announcement. But before the announcement was made, news leaked that the oil producing countries had agreed to start pumping more oil, and crude oil futures rallied strongly to settle at 69.28. OPEC’s official statement said that member countries would return to 100% compliance with the 2016 deal to cut production. Compliance had reached 152% by last month, meaning that OPEC members were cutting 600,000 additional barrels per day. Since the original deal to cut production, along with Russia, is still in effect, the announcement just means that OPEC will not be cutting as much so that actual oil pumped will still increase. But the news was enough to satisfy oil traders who had sold on the rumor of production increases and bought back crude as the expected outcome was announced.
One reason for a willingness to buy back may be the fact that US inventory numbers continue to show a drawdown, which adds to bullish sentiment. And there is reason to believe that bullish inventory reports will continue into the future. Ahead of an OPEC quota hike, member countries typically raise production as evidenced by their export figures. Saudi Arabia, Kuwait and UAE are all reporting higher exports this month. In the chart below, Saudi crude exports (blue line) from May to June jumped 500,000 barrels per day compared to the same period in 2016. At the same time, the share of exports going to Asia (red area) has increased to its highest level since the production cut deal in 2016. The increased Asian share has come at the expense of exports to the US
The effect is that the US has been forced to dip into their inventories to make up for the shortfall in supply. While US production continues to increase because of fewer regulations and technological improvements, US economic growth is also picking up, which translates to a higher demand for crude oil in general. Last week, the API inventory report showed that US oil inventories fell 3.02 million barrels, while the EIA reported a drop of 5.9 million back on June 15th. Because the US is considered the most transparent market in the world, US inventory numbers are considered more reliable and have more effect in the crude oil market.
On the daily chart below, crude oil futures had been travelling up an expanding price channel (in blue)from a low of 45.58 on August 31st of last year. On April 11th of this year, crude made a new price high and confirmed the price channel after several touches on both the upper and lower trendlines. On June 1st, it broke below the price channel on low volume, and then retraced back up the bottom of the lower trendline before falling further to make an even lower low price (on even lighter volume). Because the breakout from the price channel was on such low volume, it had a high probability of being a false breakout. Even more importantly, price did not make a proper head-and-shoulders topping pattern within the expanding price channel; instead, it broke out too fast immediately after forming the head of the pattern. This made it likely that we will see another new price high for 2018 at 72.90 inside the original blue price channel. And on Friday, the crude rally saw it recover back inside the original blue channel.
On the weekly chart below, we can see that the rising blue price channel was itself a roll-up breakout from a longer term rising price channel (in yellow). In the third price wave of this pattern, it not only confirmed the price channel by making a new high, it also broke out into a steeper rising channel. Another roll-up breakout channel from the blue channel into a steeper channel would probably be the final roll-up before a more serious correction. If crude does not decline back into the original yellow channel and instead rolls up into an even steeper channel, the long term price target would be the original long term downward breakout at $100 (yellow dotted line).
Peter Knight Advisor