Positive outlook for crude price growth to continue for Q3

Almaty. July 18. Silkroadnews – The raw materials sector rose against the US dollar’s continued weakening, head of strategy department of Saxo Bank on commodity markets Ole Slot Hansen believes, IrTAG reports.
According to him, after the weather risks reduction grain market observes a sharp price reversal, but the downward trend was compensated by growth in energy and precious metals markets with players closing short positions.
“The Bank of Canada joining the Federal Reserve System has brought the process of completing the ultra-soft monetary policy to a new level. Last Wednesday, for the first time in seven years, the FRS raised the official interest rate by a quarter point to 0.75%. Addressing the Congress, Fed Chair Janet Yellen said that despite the fact that the Fed continues to pursue a gradual normalization of interest rates, the bank may slow down the process in case inflation is below the target value”, Trend agency quoted O. Hansen saying.
The expert reminded, crude prices rose at the end of the week full of ambiguous signals. In particular, the International Energy Agency (IEA) came up with a forecast of increasing demand, and also said about probability of increase in OPEC production and a weak performance of the production restriction agreement. Once again the US reserves turned to fell more than expected, but the change was compensated by growth in production after 5 weeks of stable performance.
“Improvement with the US crude situation, which has been going on for 3 weeks, was neutralized by the OPEC group's negative news for the prices. In its monthly report on the energy market state the International Energy Agency said” “Every month something happens to slow down the balance recovery. This month there were two obstacles: a significant rise in crude production in Libya and Nigeria and a reduction in percentage of production restriction performance by the OPEC states”, O. Hansen said.
He noted, with expected increase in global demand, the IEA also said last month the percentage of compliance with the OPEC deal terms reached its minimum of 78% in six months, compared to 95% in May. The situation was aggravated by cumulative rise in oil output by Libya and Nigeria not participating in the by 700 thousand barrels per day. This poses a threat for the cartel’s efforts.
“The problem the OPEC run into is clearly seen in its own first forecast of demand for 2018. The expected growth in world demand for 1.26 million barrels per day matches with a slightly smaller increase in production of 1.14 million barrels per day by non-OPEC states. Given such forecasts, OPEC will not be able to break the deal on production reduction on March 31, as it could generate the uncontrolled crude inflows in the market”, the expert says.
According to him, a steady surplus of global crude supply coupled with a slow decline in extraction increased the relevance of low prices extended period. They are necessary to undermine the ability or desire of the US companies operating in shale oil production at high costs to build new drill towers and raise production volumes.
“However, after five weeks of stable indicators last week the US production volumes jumped by 590,000 barrels per day up to 9.39 million barrels per day. The figure corresponds to the maximum value since July 2015 and misses only 213 thousand barrels per day to reach the record set that time. Meanwhile, the US shale companies put into operation eight new drill towers every week since May, and there are no signs of a slowdown coming”, O. Hansen said.
In his view, the short-term chances of crude prices rising remain weak, and at best there could be some unexpected event to provoke further shortening of WTI and Brent short positions close to record.
“Yet a steady recovery to the corridor’s upper bound is possible only under the following conditions: a slowdown in growth of the number of oil rigs and output in the US in response to a decline in prices; significant seasonal decline in crude oil reserves in the US (normally lasts until the end of September);  maintaining discipline in the OPEC, especially for Iraq and Iran; export restrictions in key OPEC countries in the third quarter to meet increased domestic demand and slowing production growth or new production disruptions in Libya and Nigeria”, the expert said.
“We keep a positive outlook for price growth this quarter, as we believe that some of the factors mentioned above can be realized in the coming weeks. But until this happens, the oil market will remain to be controlled by “bears”, as long as the chain of falling highs stretching from February is not broken. On this basis, we project the prices of $47.3 per barrel for WTI and $50 per barrel for Brent as key levels of resistance for the near future”, O. Hansen forecasted.
He also said about gold and silver prices’ cautious attempt to rise after a rapid decline in the previous week.
“Speaking to the Congress Janet Yellen stirred in some players interest in closing short positions for gold and silver, yet both metals remain vulnerable, given the prospect for interest rates increase. On Friday decrease in consumer inflation and retail sales served to support the metals, as the news provoked rise of the Japanese yen and lowering bond yields”, O. Hansen noted.
According to him, a significant increase in debt with negative returns in early 2016 caused a rapid increase in gold prices in the first half of 2016. When central banks headed for the normalization of monetary policy, the yield of bonds began to grow, which means that the level of outstanding debts with negative yields decreased, and the markets for gold and silver run into difficulties.
“A break of $1214 per ounce in the gold market last week served as a signal for technical sales based on the formed figure of the double top at level $1295 (April and June peaks). Now the target is $1133 per ounce, which has attracted new short sellers to the market”, the expert concluded.