Why Oil is Struggling in Oversold Territory

Since early October 2018, oil prices have been clobbered.

Prices sank from a high of $76.90 to a recent low of $49.41. 

Major oil companies sank right along with it.

  • Exxon Mobil (XOM) fell from $86 to $75
  • Chevron (CVX) plummeted from $126 to $108
  • Occidental Petroleum (OXY) dropped from $82 to $65

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Technically, it’s overkill. 

As of December 2018, oil appears to have caught support at $51.  That puts it at support dating back to August 2017. In addition, as you can see in the chart, oil is excessively oversold on relative strength (RSI), MACD and Williams’ %R.

However, while many view the pullbacks as overkill, it didn’t come as a major shock. 

The world is still awash in oil supply. The U.S. is pumping at record levels and just passed Russia and Saudi Arabia as the world’s largest oil producer. In fact, the surge in U.S. supply to 11.475 million barrels a day is causing a good deal of concern.

Making things worse, there was an incredible glut of oil in November 2018, thanks to a ramp-up of production by Russia, the U.S. and the Saudis ahead of the Iranian sanctions.   

Ongoing trade disputes threatened demand and growth.

And a stronger dollar, which now sits at 97.18 didn’t exactly help much.

However, there are hopes that a turnaround in the oil markets is nearing.

In December 2018, major oil producers agreed to cut oil production by 1.2 million barrels a day for the first six months of 2019. Of that, the OPEC cartel will remove 800,000 barrels per day.

Russia and other allied producers will cut up to 400,000 bpd.

However, there’s always an issue when it comes to OPEC and Russia.

A deal may be in place, but not everyone may stick to it.

“Uncertainty remains given the OPEC+ deal doesn't specify country allocations and exempts Libya, Venezuela and Iran, according to Goldman Sachs. While Morgan Stanley said the cuts will probably be sufficient to balance the market in the first half of next year, the bank sees limited upside to prices,” notes the Houston Chronicle.

In addition, OPEC is notorious for cheating on quotas. 

And, “the math, as usual remains fuzzy,” as noted by MarketWatch.

“Iran, Venezuela and Libya are exempt from the deal, but due to the usual politics within the group, these will not be called exemptions,” he said. “And because OPEC does not want to grant anyone exemptions and because the three countries in question simply would not sign off without one, OPEC will not be releasing country level breakdowns.”

Russia has already noted it may not be able to keep up with its agreed-upon cuts. For example, Russian Oil Minister Alexander Novak has said it would be difficult for Russia to cut oil production in the winter months, as noted by Investor’s Business Daily. 

In short, oil price watchers should be prepared for further volatility in the oil markets.

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