Oil, fundamental analysis

Oil prices plummeted this week following last week’s rally as the market viewed the results of the US mid-term elections as potentially bringing an end to the Iran war. Meanwhile, attacks on ships in the Persian Gulf region continue as does the Saudi-Houthi conflict. The fifth-straight weekly inventory decline could not support the downside either.

WTI’s High was Monday’s $102.75/bbl while the Low was Thursday’s $86.65. The December contract is down $13.00/bbl on the week. Brent crude hit its High on Monday at $106.65/bbl with the low on Wednesday at $93.40 and is down almost $15.00/bbl vs. last week. The WTI/Brent spread has now tightened to $7.50.

Prior to Tuesday’s elections, there had been talk of some level of diplomatic progress between the US and Iran with Qatar acting as an intermediary while President Trump pledged to hold off on any attacks until after the election. Instead, he ordered a strike on Qeshm Island prior to Tuesday’s voting.

The election results now have the market more optimistic about some form of settlement as the Democratic victories were, in part, in response to the unpopularity of the war and especially, its impact on energy prices. However, much uncertainty regarding the real situation in the Middle East remains. President Trump could continue military action against Iran and Iran has continued to attack vessels in the Persian Gulf even employing small boats to attach so-called, limpet mines to the hulls of ships. Meanwhile, the Yemeni-Houthis are still threatening the close-off Saudi Arabia’s Red Sea export access.

While estimates vary, flows of oil through the Strait of Hormuz do remain robust with upwards of 20 million b/d being reported. JP Morgan believes there may actually be a global surplus of crude to the tune of 1.1 million b/d on both loosening shipments and lower demand. However, shipments of refined products remain stifled largely do to damage suffered by refineries upstream of the Strait. Adding to the overall supply disruption picture, Ukraine continues to target Russian refineries, hitting 6 this week alone. And Russian continues its ban on diesel exports except for those already promised to the US.

The Energy Information Administration’s (EIA) Weekly Petroleum Status Report indicated that commercial crude oil inventories for last week decreased by 900,000 bbl from the previous week. The Strategic PEtroleum Reserve (SPR) held at 283 million bbl (the lowest level since 1982). Production last rose 11,000 b/d to 14.003 million b/d vs. 13.992 million b/d the prior week and 13.65 last year.

October job additions were up 165,000, up from September’s 29,000 increase, and higher than the 59,000 increase forecast. Unemployment dipped to 4.1% vs. an expected 4.2%. Personal income rose 0.37% to an annual average of +3.12% which is still lower than inflation. The surprise increase in employment may grant the Fed the ability to raise rates to curb inflation while not negatively impacting the job market. US stocks suffered a major selloff on Thursday and rebounded Friday but experienced losses week-on-week. A rally occurred on Wednesday when traders believed the mid-term results would lead to an eventual end to the inflation-raising Iran war.

On Thursday, however, tech stocks got hammered leaving the Dow down 1,800 pts, the S&P down 4.3%, and the NASDAQ down 5.5%. The USD and gold are both higher than last week.

Oil, technical analysis