In December 2016, OPEC and non-OPEC members signed an agreement to cut Oil production in the hope of ending the supply glut and ultimately achieving global price stability. A production adjustment of 1.2 million barrels a day was implemented on January 1st, 2017 and the agreement was further extended in mid-May. Despite this commitment to curb production, Oil prices have since plunged 15%, due to excess supply from Nigeria and Libya, 2 OPEC members that were exempt from the agreement.
As stated in the Financial Times, “although output in both Nigeria and Libya remains volatile due to political instability and violence, their combined production increased by more than 350,000 b/d last month […] That amount is equal to more than a quarter of the supply curbs OPEC has implemented in 2017 as part of a push to bring down excess stockpiles that have kept pressure on prices”.
U.S. Oil production has also increased significantly, disrupting OPEC’s efforts to balance an oversupplied market. The country’s output has surged, with record-high rig counts recorded for 10 consecutive months.
Traders had been optimistic about a stabilisation of the Oil market following the OPEC deal. However, with Oil now trading below USD 43 a barrel, the outlook has taken a negative turn.
Oil is now entering a bear market, trading at least 20% below its 52-week high. Prices are below the Moving Average and its short-term 20-day Simple Moving Average has been slipping below the 50-day SMA and the RSI has been oversold, falling below 30.
Moving Averages are used by traders to analyse an asset’s price trend for different time frames. Thanks to the positioning of prices relative to the MA, traders can easily identify the overall trend of an asset (bullish or bearish), often by using 2 Moving Averages: 1 short MA and 1 long MA.
The Oil price collapse has affected Wall Street, with energy stocks including Chevron and Exxon Mobile each falling more than 9% on Tuesday. The S&P 500’s energy index dropped 1.3%, resulting a total loss of more than 13% since January 2017. This has forced many analysts to lower their price targets for companies including Baker Hughes, Halliburton, Schlumberger, Shell, and BP.
For the 4th time in 18 months, the Fed increased last week the federal funds rate by 25 basis points with a target range now between 1% and 1.25%. Dollar is strengthening since then after reaching its lowest level since Trump’s election, which is negative for commodities’ prices, as both have a negative correlation.
When the dollar strengthens, it means that commodities become more expensive for people who hold currencies other than the dollar. This will have a negative impact on demand. Indeed, if the dollar strengthens against the currency of a commodities buyer, then he will have to spend more of his own currency in order to buy the same amount of commodities as before. They therefore become more expensive, demand decreases due to lower purchasing power, and prices fall.
Conversely, when the dollar weakens, the price of commodities tends to increase, because any weakening of the USD stimulates commodities buyers with other currencies, which will increase their purchasing power. But this negative correlation between the USD and commodities is not as simple or as binary as it seems.
As stated in the Financial Times, “although output in both Nigeria and Libya remains volatile due to political instability and violence, their combined production increased by more than 350,000 b/d last month […] That amount is equal to more than a quarter of the supply curbs OPEC has implemented in 2017 as part of a push to bring down excess stockpiles that have kept pressure on prices”.
U.S. Oil production has also increased significantly, disrupting OPEC’s efforts to balance an oversupplied market. The country’s output has surged, with record-high rig counts recorded for 10 consecutive months.
Traders had been optimistic about a stabilisation of the Oil market following the OPEC deal. However, with Oil now trading below USD 43 a barrel, the outlook has taken a negative turn.
Oil is now entering a bear market, trading at least 20% below its 52-week high. Prices are below the Moving Average and its short-term 20-day Simple Moving Average has been slipping below the 50-day SMA and the RSI has been oversold, falling below 30.
Moving Averages are used by traders to analyse an asset’s price trend for different time frames. Thanks to the positioning of prices relative to the MA, traders can easily identify the overall trend of an asset (bullish or bearish), often by using 2 Moving Averages: 1 short MA and 1 long MA.
The Oil price collapse has affected Wall Street, with energy stocks including Chevron and Exxon Mobile each falling more than 9% on Tuesday. The S&P 500’s energy index dropped 1.3%, resulting a total loss of more than 13% since January 2017. This has forced many analysts to lower their price targets for companies including Baker Hughes, Halliburton, Schlumberger, Shell, and BP.
For the 4th time in 18 months, the Fed increased last week the federal funds rate by 25 basis points with a target range now between 1% and 1.25%. Dollar is strengthening since then after reaching its lowest level since Trump’s election, which is negative for commodities’ prices, as both have a negative correlation.
When the dollar strengthens, it means that commodities become more expensive for people who hold currencies other than the dollar. This will have a negative impact on demand. Indeed, if the dollar strengthens against the currency of a commodities buyer, then he will have to spend more of his own currency in order to buy the same amount of commodities as before. They therefore become more expensive, demand decreases due to lower purchasing power, and prices fall.
Conversely, when the dollar weakens, the price of commodities tends to increase, because any weakening of the USD stimulates commodities buyers with other currencies, which will increase their purchasing power. But this negative correlation between the USD and commodities is not as simple or as binary as it seems.
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