Key Points

• OPEC considering extending production cuts until March 2021
• Prices subdued as virus cases continue to rise
• Technical analysis, price at support level

OPEC led by its de-facto leader Saudi Arabia is contemplating extending the current production cuts until the first quarter of 2021. Current OPEC+ production stands at 7.7 million barrels per day and these cuts have been successful in holding prices stable around the $40 per barrel over the past five months. This price tag runs short of the prices required by most OPEC members in order to balance their respective budgets. For instance, UAE requires $45 per barrel just to be able to balance its National Budget whilst other producers require even higher prices.

U.S. Shale production is currently hanging on the balance because of two main reasons, chiefly being the outcome of the U.S. presidential elections. President Trump is a staunch supporter of the Fracking industry his main argument being the number of jobs created by the sector regardless of the environment damage caused by Fracking. On the contrary, Joe Biden vowed to halt Fracking and drive the economy towards renewable energy.

U.S. producers are also under pressure because of the prevailing low oil prices. Most producers are currently struggling to earn profits and are on the brink of shutdown a plethora of wells. The bankruptcy of the Fracking industry will leave OPEC with little to no competition.

The resurgence of Covid-19 cases in Europe and United States has dashed the hopes of a strong oil price recovery. The newly imposed lockdown measures in Europe has reduced the demand for crude products in the manufacturing sector. Travel restrictions have eliminated the recovery in demand for Jet fuel and combustion engines fuels. As a result, prices a set to remain subdued until the restrictions are eased and an effective vaccine has been dispatched.

On the technical analysis frontier, traders are looking at prices as being slightly oversold (4 Hour Chart) and sitting on a key support level. On the top side, prices are struggling to break beyond the $40 handle to retest the October highs. The $36 support was pierced through last week but a strong recovery ensued leaving bears exposed at $34,43. The outlook remains broadly neutral and the likely verdict will be a period of consolidation until new information strikes the market.