Oil market overview

Oil prices extended gains for a six-straight day after falling near 20% since mid-May when OPEC and non-OPEC producers extended their output reduction deal until March 2018, but with lesser than expected cuts. Brent oil futures spiked to $48.10 after the US Energy Information said that country’s weekly production decreased 100K per barrel to 9.3. million bpd (the biggest decline since last year summer). An indication of the surprise build in crude inventories was discarded by jubilant oil buyers.  Some analysts believe that traders’ excitement is premature. The output decline is likely temporary; the decline in the US production was caused by the storm disruption to the activity in the Gulf of Mexico last week.

In the upcoming days, crude oil futures will likely lose their earlier gains. There is a sense that markets are still oversupplied with upticks in Nigeria’s and Libya’s output which exempted from the OPEC-led production cut deal. Earlier in June, Libya's 270,000-bpd Sharara oilfield was reopened after political situation in the country stabilized. The oil demand is decreasing worldwide. India’s prime minister Narendra Modi has recently announced that the nation seeks to cut its dependence on oil imports and push forward the domestic production. India is the world’s third-biggest oil importer, so reductions in the longer term will send oil prices lower.

Another headwind for oil prices was increasing tension in the Middle East. In early June, Saudi Arabia and a group of its close allies decided to punish Qatar for its support of Iran and terrorist groups. The land, sea and air blockade of the country was established in a matter of time. The following event was negatively perceived by the market participants; it could undermine OPEC’s effort to curb oil glut as some parties of the deal will more likely to cheat and sell more oil above the assigned quota (Qatar, for example, retaliate its neighbors for the blockade). The Qataris and Saudis are still seeking a diplomatic solution. Last week, the Saudi King promoted Mohammed bin Salman to the position of Crown Prince (it means that he will likely become the next king). The Crown price took a hard line against Iran and accused its foreign affairs in Yemen. The blockade should make Qatar to abstract itself from Iran. If there is a peaceful solution to the situation with Qatar, oil price will rise (the peaceful solution will likely to occur). The newly promoted Crown Prince will play a high stake game with the Iranians in the process of resolution of Qatari problem. If he wins, the reaction of the oil prices will also be positive.

At the time of writing, Brent oil futures are trading at $48.12. There is a scope for extension to $49. A break above $50 is unlikely though given the lack of positive fundamentals. On the downside, there are several supports at $46.20, $45.75 levels.