Oil prices have been headed down since the start of this week, driven by a complex combination of geopolitical and market forces at play. Saudi Arabia has since admitted that it produced above its quota on multiple days in June. This is great news, not just for the United States, but for the world oil supply. The U.S. oil market is starting to ease, which is playing a role in pushing down prices even more. This situation comes amid ongoing conflicts in Syria, where military withdrawals and a fragile truce have raised concerns regarding stability in the region.
Saudi Arabia’s Increased Oil Production
The Kingdom of Saudi Arabia, the most influential member of the Organization of the Petroleum Exporting Countries (OPEC), just made a big announcement. For example, in June it secretly functioned above its pledged production quota for 15 straight days. This increase in domestic production does lead to some interesting questions around OPEC compliance and whether higher US oil production will keep global oil prices in check.
OPEC’s latest monthly report would have missed the big increase in Saudi production. This would lead to confusion and a lack of consistency among market participants.
“OPEC+ producers pumped 41.559 million barrels per day (bpd) of crude oil in June, up by 349,000 bpd from May, but lower than the 411,000 bpd monthly increase under the alliance’s output hike plan.” – OILPRICE
Analysts are closely monitoring these developments and their implications for supply and demand balance in the coming weeks.
Easing US Oil Market
The upshot for the U.S. oil market is that notable easing is materializing, which will likely weigh further on oil prices. The American Petroleum Institute (API) reported a significant build-up of U.S. oil inventories, revealing an increase of 19.1 million barrels. This huge increase reflects a huge gap in demand in the marketplace. Consequently, we are likely to see additional downward pressure on prices.
West Texas Intermediate (WTI) crude oil prices are trading in a range between $63.70 (S1) support and $67.10 (R1) resistance. This small range further highlights the market’s fearful step. For a bearish scenario to develop, price needs to clearly break below the $63.70 support line. Otherwise, bears will be looking for a decline to $59.45 (S2). For the bullish outlook to materialize, WTI prices need to close above ascending resistance line around $67.10. Accomplishing this would establish a target price of $71.15 (R2).
Over the last month Baker Hughes reported a decline in active oil rigs in the U.S. The number decreased from 425 to 423. Active rigs have now dropped for 11 weeks straight. This trend is a further sign that demand as well as production capacity are still subsiding.
Syrian Conflict and Its Implications
Alongside these encouraging market trends in the region, there are some big things brewing inside Syria as well. Just a week ago, the country’s president announced a pullback of troops from a major city as the doorbell of war continues to ring. President Bashar al-Assad underscored their eagerness for war, outright saying they are “not scared.” He was clear that their number one focus is taking care of their own people.
A humanitarian cease agreement has been achieved in Syria. Continued accusations of human rights abuses threaten its permanence and risk fanning the flames of discord once again.
Geopolitical instability in Syria has the potential to significantly rattle oil markets. It will break the flow of Iranian oil through neighboring territories and increase fears about stability along the wider Middle East.