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Crude oil on shaky ground as OPEC-led deal remains at risk

  • US crude oil, as represented by the West Texas Intermediate benchmark, fell on Monday to retest the key $47-area support level. This major technical support marks the year-to-date lows, which have already been tested twice within the past two weeks.
  • Pressure on oil prices during the month of March has been exacerbated primarily by two key factors – 1) concerns that US production is quickly expanding and 2) questions as to whether the current OPEC-led deal to cut production will be extended beyond its current end date in June.
  • Over the weekend, oil ministers from OPEC and non-OPEC nations that have participated in the deal agreed to consider an extension. However, the committee of oil ministers did not actually recommend an extension as they had previously.
  • While it should be likely that the OPEC-led deal will ultimately be extended, perhaps a more pressing question is how well deal participants will continue to comply with the agreement, particularly non-OPEC countries like Russia.
  • Adding onto crude oil supply concerns amid increasing US production and the questionable future of the output deal, the International Energy Agency recently asserted that oil demand is expected to drop from 1.6M barrels a day last year to 1.4M in 2017.
  • Overall, current fundamental conditions continue to place pressure on crude oil prices, as few catalysts presently exist to cause any appreciable recovery.
  • From a technical perspective, US crude oil has been in a pressured consolidation for the past two weeks after having plunged from the $50’s earlier in the month. As noted, Monday saw an early drop to retest the $47-area support lows, forming what now appears as a tentative triple bottom pattern. Although such patterns sometimes point to a price-bottoming, current fundamental pressures continue to weigh on crude oil prices. With any continued pressure, a breakdown below $47 support could target the next major downside objective at the key $45 support level.

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