The price of Brent Crude, an international benchmark for the oil price, reached its highest level since December 2014 last night after briefly popping above the $70 a barrel level. Reports of a breakthrough in German coalition talks have boosted the euro this morning with the single currency hitting a 3-year high against the US dollar after moving above the 1.21 handle.
Oil bulls continue their charge
The second half of 2017 saw a strong move higher in the price of oil after Brent Crude bottomed out in the low $40s in mid June. A concerted effort from OPEC and non-OPEC producers to reduce stockpiles is imparting a clear squeeze on supply with the latest inventory data from the US showing a drop of 4.9M barrels in their stockpiles in the past week. The decline is the 7th consecutive drawdown and there are increasing signs that the supply glut which saw the market crash below $30 a barrel in early 2016 is over for the time being and those who have felt the pain of low oil prices in recent years will believe the desired market rebalancing has taken effect.
Too far, too fast?
Given the positive fundamental developments for the market, with reducing global supply and more recently rising tensions in Tehran it is not too surprising that price has risen. Furthermore, from a technical point of view the market has been bullish for quite some time but there remains much to be done before we see price get back anywhere near the $100 per barrel mark once more. In the short term technical several indicators are flashing overbought signals whilst a record level of speculative longs could be seen to provide a headwind for two reasons; on the one hand there may be a reduced level of buying pressure to enter the market going forward should the outlook improve further and on the other any negative developments could see hedge funds rush to lock-in profits after the recent rally and in turn drive price lower.
OPEC may look to check recent gains
Longer term the outlook will largely depend on supply, assuming that demand remains robust against a strong global economic backdrop. The continued efforts of suppliers to maintain production around these levels will be crucial in supporting the market with further gains in US shale production an unwanted but inevitable consequence of the price rise. The forward curve is getting increasingly steep as backwardation grows, suggesting that US producers may be taking advantage of recent oil price gains to hedge future production further out whilst short term impacts, such as Iranian tensions, lift the front end. OPEC will be well aware of this and it would not be too surprising if there’s some rhetoric from the cartel in the coming weeks aimed at letting some of the air out of the latest surge higher.
Euro surges on German coalition breakthrough
A “grand coalition” between Angela Merkel’s Christian Democrat party and their closest rivals the Social Democrats looks increasingly likely after reports of a major breakthrough in negotiations this morning has raised hopes of ending the political deadlock seen in Germany since the inconclusive elections back in September. The news has boosted the euro, with the single currency surging across the board. The single currency has broken above the 1.21 handle against the US dollar to take out last year’s high and trade at a level not seen since 2014. A EUR/USD chart bears an uncanny resemblance to that of oil and after a large drop in 2014 and 2015 the market may have carved out a longer term bottom and be looking to move back to levels not seen in quite some time.