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Crude oil price “free fall” is coming to an end

Crude oil 1-Opec is learning from the US Fed Bank a new crude oil pricing tactic in baby steps .

In Dec 2015 US Federal Bank had the first rate hike in a decade to be increased in baby steps to reach the 2.5% by end of 2016 .After 11 months and 23 press conferences without changing the rate,the Fed kept the market expecting a hike in the rate. The market as a result ruled out completely a cut in the Fed Rate .Effectively , the market was manipulated towards growth . rather than the expectation of a cut in the rate

This week, OPEC,in its Algerian meeting , manipulated the crude oil market into expecting a cut in production by “agreeing” that they will “collectively” cut crude oil production in their next November meeting in Vienna to improve the crude oil market .. This has effectively set a floor or support line for crude oil prices . OPEC ministers went home with $ 48 crude oil price instead of the expected $39 had they left without a “decision”.

This in contrast to earlier statements by OPEC member countries, “Crude oil prices are not our problem… we sell at any price “ declared Prince Mohamed of Saudi Arabia before the Doha meeting this year, which increased “ Fear Index on the futures market “ and pushed the crude oil prices up then , but the recent statement by Saudi minister of Oil lowered the Fear Index when he said lately that the kingdom is ready to help other Opec was enough to lowered the price floor on the futures market .

The futures Market is basically a speculative market. The participants flock together, and react in a near real –time to the market signals “collectively” because it is safer and involves less risk.

This makes the Futures market prone to manipulation by the Media, the central banks, major financial institutions, Petroleum organizations, like EIA,IEA, Api, and many Private Petroleum Agencies. These organizations are becoming increasing powerful by racing to send more and more signals usually conflicting signals (International Energy Agency has warned of a weak petroleum market next year, while Goldman Sachs predicted " OPEC Freeze Could Add $10 To Oil Prices". others say,OPEC’s prospective deal may not create a lasting Oil Rally

The impact of The Algerian agreement

Crude oil Crude oil 1-Opec have effectively learnt belatedly the trick of sending positive signals to the Futures Market .OPEC has also came to the realization that the short term crude oil price is determined by the futures market, and in the long run these movements in crude oil prices on futures market are changing the market fundamentals and the investment pattern in the oil industry .This is a historical Change in Opec policy.

2-Opec in its November meeting may not need any cut in crude oil production, if we consider the experience of US Fed Bank . By November, the crude oil floor price may increase even if opec postpones the cut to February 2017. The market is beginning to see a change in Opec policy and the chances of a free fall in prices are too remote.

3- Improving the market expectation does not dependent on the amount of the production cut , but rather a cut in the number of conflicting statements made by Opec ministers, What the market fears most is the present state of “ free fall” in crude oil prices which we witnessed in 2014 -2016 . The fall was accelerated when Opec declared “Let the market decide the crude oil price“ and by the policy of “ defending the Opec Market Share at any price “. The Algeria meeting has sent a signal to the market that the major crude oil producers are feeling the pain of low prices and are ready to defend the Support Line on the futures market.

4-The dilemma in the crude oil market today is how to destock.Almost 260 million barrels of extra petroleum piled-up in USA alone with similar quantities in Europe , china and in India .This was the result of wrong price expectations since 2014 . The cost of holding these inventories for such a long time has turned the present price level into a floor ( Support Line) while the physical shortage of oil storages,have increased the upper resistece line and also cut drastically the demand for speculative restocking.No matter how low the prices gets , the storage shortage and cost are constraining factors. What we are witnessing now is a desire to trim inventories without causing further collapse….. look at the destocking process in the graph below

Jabbar al-Jaf:Oil Market Analyst