When you open your MT4 charts on a Monday morning and you are greeted with this gap up in oil, you know you’ve got a potential game changer on our hands.
Oil 1 Minute:
The opening gap was in reply to the dispatching of the 81 year old Saudi Arabian Oil Minister, Ali al-Naimi. His replacement will be former head of the state owned oil company, Aramco (Saudi Arabian Oil Co): Khalid al-Falih.
While this move has been anticipated by oil analysts for quite some time, the fact that al-Falih doesn’t have the OPEC experience or relationships that al-Naimi had screams uncertainty.
Adding another spanner in the works is the fact that al-Falih is a key ally of Deputy Crown Prince, Mohammed bin Salman. The anticipation is that bin Salman will now take further control over the setting of Oil supply policy. With bin Salman essentially having the overruling no vote on Saudi Arabia’s refusal to limit global oil supply, this appointment all but scuttles hopes of a deal in the near term.
Why Saudi Arabia Refuses to Limit Supply to Increase Prices?
The question of why Saudi Arabia is willing to essentially hurt itself economically by refusing to vote on a supply cut to increase prices (and therefore their bottom line), is a question that comes up a lot. If you are an economy reliant on Oil exports and you had a controlling vote which would have a positive effect on price, then surely the common sense thing would be to use it?
But Saudi Arabian policy led by bin Salman takes a different, longer term view. With a new frontier of oil production coming in the form of US shale producers, the settled OPEC ‘old guard’ led by Saudi Arabia is now fiercely embroiled in a price war with the US shale industry. The cost of shale production is much higher, so lower prices make their main rival uneconomical.
The second side to this underground price war is the re-emergence of regional, political and economic rival Iran onto the world stage. After global sanctions were lifted, Iran has made it clear that their goal is to ramp up production and try to take a share of years of missed revenues while they have been left out of the loop. Saudi Arabia’s view is therefore, why would they want to limit their own supply and share of profits while Iran simply takes over?
There is one more side to Saudi Arabia’s refusal to limit supply, and that is purely politically motivated. Prince bin Salman is leading a push to make Saudi Arabia less dependent on oil revenues. He has overseen the sale of part of Aramco in an attempt to diversify the country’s revenue stream into non-oil assets. So from a political viewpoint, lower oil prices actually make his political argument at home stronger.
So why has Oil rallied?
“But everything I read above sounds bearish Oil” I can hear you say. So why on Earth has Oil rallied?!
In one word: Uncertainty.
Oil Daily:
With price already bouncing from technical lows on the WTI daily chart, this political change screams unpredictability and that is why the market has jumped in the short term. The final word bolded for effect.
Something else to keep in mind is the wildfires burning through the Canadian Oil Sands region. The actual length of supply limitations that this fire could cause is still yet to be seen, but where there’s smoke…
You should know by now that markets aren’t completely rational things. They try to predict the future when you think they probably shouldn’t and then don’t when you think they probably should. As a trader, you need to come to terms with the fact that your opinion does not matter.
The only thing that matters is price. So buckle your seatbelts, buy your tickets and enjoy the ride. It’s going to be a wild one.
Chart of the Day:
Remember Friday’s NFP?
“USD Non-Farm Employment Change (160K v 203K expected)”
“USD Unemployment Rate (5.0% v 5.0% expected)”
“USD Average Hourly Earnings m/m (0.3% v 0.3% expected)”
EUR/USD Hourly:
We spoke Friday about this EUR/USD hourly level and following the NFP headline miss, the zone is still in play. Fundamentally the Fed’s thinking will probably not have been affected by the miss. They were already leaning to the dovish side on the direction of 2016 rates and this will not have had an impact.
USD strength was in play before the release and with nothing fundamentally changing, momentum is still in play.
Mark your levels that are in play and trade price action around them. Follow and join us on the @VantageFX Twitter account to join the live trading discussion from here.
From the Calendar:
CNY Trade Balance (298B v 250B expected)
AUD ANZ Job Advertisements
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