Oil: Does not see a breakout appear to be at hand - BBH

Research Team at BBH, suggests that some saw the reports that OPEC output may have slipped in August as some kind of sign that an agreement is looming. 

Key Quotes

“We see it differently.  The minor 45k barrel decline in Saudi output is noise.  It may be a result of less production for domestic demand.  Saudi Arabia is one of the few countries that burn oil for electricity, and demand for cooling often sees this kind of seasonal pattern.

Moreover, insight from game theory, assuming rational actors, output is not cut ahead of an anticipated freeze.  It is boost instead to lock in a superior position for the freeze and possible future agreements for a cut in output.  In addition, we had previously anticipated that the Iranian output would be back at pre-embargo levels by the end of this year, creating the conditions for a future agreement.  However, the latest indications suggest its output may have stalled recently. 

In any event, the second boost to oil prices came from large drop in US oil and gas inventories. The market overreacted.  The dramatic fall stemmed from weather conditions (hurricane) rather than a sudden restoration of equilibrium.  After the large run-up, oil prices fell ahead of the weekend.  Brent managed to finish the week 2.5% higher at $48 (front-month November futures contract) after dropping 4% at the end of last week.  WTI fell 3.7% on Friday, leaving it up 3.2% on the week, a little below $46 (front-month October futures contract).  Both are down nearly 2% today. 

We are skeptical of the merits of either of the two considerations that lifted oil prices.  However, the real takeaway is that the price of oil has largely been in a $40-$50 range for six months (with Brent a little higher).  From neither a fundamental nor technical point of view does a breakout appear to be at hand. 

More broadly, commodity prices are trading heavily.  Even though the CRB Index closed higher (1.4%), it lost its momentum ahead of the weekend and fell 1.7%.  It held below its 100-day moving average and is 7% below its May highs.  The combination of falling oil and commodity prices, coupled with rising core yields, saw the Australian and Canadian dollar sell-off in the last three sessions.  Technically, they look vulnerable as well.”