Oil price retraces but risks remain
The recent drone strikes on Saudi Arabia has seen the price on Brent Crude breaking out of the downtrend which has been in place since May this year.
A spike in the oil price
Oil prices have been given a boost this week following news of a drone strike on two major facilities in Saudi Arabia. The strike was said to have disrupted output from the region to the amount of 5.7million barrels per day, roughly 6% of global production. The disruption is said to be amongst the largest on record and saw an initial 19% jump in crude pricing.
Production recovery
US president Donald Trump has suggested tapping strategic reserves to curb the impact of crude shortfalls, following the Saudi attacks. Russia has also lent its support and highlighted that global oil reserves remained enough to temper the mid-term losses in output which could stem from the geopolitical tensions.
Saudi Arabia has however already managed to recoup 2million barrels per day in output and given guidance that the balance of production lost should be recovered shortly as well.
Geopolitical risk remains
The drone strike and subsequent move in oil highlights continued hostility within the Middle East and oil’s vulnerability to geopolitical tension. While Yemen rebels have claimed responsibility for the attack, some US officials have suggested that Iran may have had an influence in the Saudi attack (a claim which Iran firmly denies). US president Donald Trump has threatened retaliation to the bombing once all the facts of the event are uncovered. In turn there remains a threat of increased geopolitical tension within the Middle East and an upside risk to the price of oil through further disruption.
Supply vs demand
Markets continue to assess the balance of supply verse demand for oil. On the supply side the OPEC+ (Organisation of Petroleum Exporting Countries & Russia) have extended the production curbs of 1.2million barrels per day, which commenced in January this year. Further supply constraints have manifested from the sanctioning of Iran and Venezuela by the US. The Energy Information Administration (EIA) has also warned of an oil glut in 2020 largely as a result of an increasing oil rig count and shale initiatives in the US.
A slowing rate of growth for the global economy and recessionary fears have been keeping oil prices subdued on the suggestion of reduced demand for the commodity. The ongoing trade war narrative remains a further threat to global growth which has continuously been reflecting in the price of oil. Markets will be looking to renewed talks between China and the US (commencing imminently) and monitoring tensions in the Middle East for near term directional guidance on the commodity.
Brent Crude – Technical View
The recent drone strikes on Saudi Arabia has seen the price on Brent Crude breaking out of the downtrend which has been in place since May this year. The sharp move higher has left a large price gap which the market is currently attempting to fill.
The current pullback from the upside breakout considers a second opportunity for a long entry in the crude market. Traders might hope for the pull back to extend closer to the $60.90/barrel level to find entry, targeting a move back towards the $67.15/barrel mark, possibly $71/barrel in extension. In this scenario, traders might use a close below $58.60/barrel as a stop loss consideration for the trade.
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