Markets are struggling to find direction in what seemed to be a boring trading week. The dollar index moved in a relatively tight range of 94.21-94.95, and the S&P 500 was stuck in a 22 points trading range, however the only major action was seen in oil prices which dropped by more than 3.3% since the beginning of the week. So let’s discuss oil!
Talks of a potential deal from members of the Organization of the Petroleum Exporting Counties (OPEC) to freeze production sent oil prices into a bull market territory last week, but these hopes were dampened after Iran said it still hasn’t decided whether it will attend the informal talks in Algiers next month.
Fundamentals have been clearly ignored in August as price action was driven solely by verbal interventions; itremains to be seen whether this is going to be converted into actions. Another disappointing meeting similar to April’s talks in Doha will not only lead to lower oil prices, but also threatens OPEC’s influence on prices going forward. The only major obstacle to reaching a deal has been the Saudi Iranian conflict, and if they didn’t manage to put political disagreements aside, I think it’s going to be another disappointment in September.
Another challenge facing OPEC’s decision is the U.S. shale production. Rig counts rose for 8 consecutive weeks and exceeded 400 for the first time since February. This suggests that U.S. oil producers are ready to start pumping in the next couple of months especially if oil prices stabilise close to $50. A production freeze will end the war on shale oil which brings the question, why did it start in the first place?
Yesterday’s weekly inventory data showed U.S. stockpiles rose unexpectedly by 2.5 million barrels in the week through Aug 19 as refineries input decreased, and I believe that more stocks will be built in the weeks ahead as refineries switch off for regular maintenance, which puts limits on any upside potential move.
Another factor to influence oil prices is the dollar’s direction. All investors are looking ahead to see if Chair Janet Yellen will provide hints about the US Federal Reserve’s next monetary policy move. Although she might seem more hawkish on the economy, I’m afraid that investors who are expecting more clarity on the timing of the next rate hike will be disappointed. However, if she decides to surprise and open the door for a September move than a dollar rally will add more pressure on oil.
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