Oil Price Spikes to Nowhere

Oil is the big mover today after the IEA said that OPEC is strictly complying with the production cut agreement. BK’s comment: No Sh!t. Saudi Arabia is in the long process of launching and marketing the Saudi Aramco IPO that is expected to trade in 2018. During this process it is in Saudi Arabia’s best interest to keep the front month oil contract relatively high.

This short term chart shows today’s price move.

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But when we zoom out to a weekly chart it is easy to see that oil has really gone nowhere since breaking above $50. This actually suits the Saudis just fine.

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If the price of oil rises too much then the US producers will flood the market with supply and make it more difficult for Saudi Arabia to keep the price elevated. The trick is to keep the front month elevated while keeping the back months depressed so that US producers cannot hedge future production. So far this game has worked, but in the IEA report that caused the price spike, it was also noted that in the second half of 2017 supply is expected to increase without a commensurate increase in demand.

Bottom Line: oil remains range bound, but when it breaks it will have global implications.