Is Oil Facing Resistance At $50 Per Barrel?

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Summary

A new report states that Iraq has refused to be a part of OPEC’s upcoming production cut.

The OPEC-Russia deal is still uncertain as more details are needed.

Oil imports from China and India are increasing.

U.S oil production decline is expected to slow down.

In one of my earlier articles, I explained how OPEC's second biggest oil producer - Iraq - was looking to defy the cartel's upcoming production cut. Iraq's oil minister had earlier asked its oil and gas producers to increase their production till 2017. And now, a new report states that Iraq has refused to be a part of OPEC's upcoming production cut. Oil prices came under bit of a pressure after this news, with WTI and Brent trading at $50.79 and $51.78 respectively at the time of writing this article.

OPEC-Russia Deal Is Still Uncertain

The development in Iraq will definitely have a big impact on Saudi-Russia partnership as far as their joint production cut is concerned. Iran, Nigeria and Libya have already been exempted from the upcoming production cut. And, if even Iraq joins these countries, then this will put a lot of pressure on Saudi Arabia. Even the latest meeting between the Energy Ministers of Russia and Saudi Arabia did not produce any specific results.

"Saudi Arabia has started to play an important role to coordinate between Russia and OPEC, specifically the Gulf countries. We have managed today, through a common meeting to reach a common notion to what we can reach in November," said Saudi Arabia's Energy Minister Khalid Al Falih. He also said that Saudi Arabia's views on stabilizing the oil markets were getting "closer" to Russia. On the other hand, Russia's Energy Minister Alexander Novak said, "we discussed questions related to freezing oil production in Russia and other countries that may join in. But it's too early to call specific figures. We still have time until November 30, when OPEC is planning to develop a joint solution." In my opinion, these comments will add more speculations in the markets with regards to the OPEC-Russia deal.

Rising Oil Imports From Asia

Off late, many oil bulls are predicting that oil prices are going to increase substantially in the coming time. In fact, Marc Faber, who is also known as Dr. Doom for his pessimistic views on markets, has predicted that oil will rise to $70 in the near future. According to Faber, economic growth in emerging Asia will be the biggest factor responsible for the surge in oil prices. In my opinion, the rising oil demand from Asia will definitely support oil prices.

In fact, Asia's oil demand is actually supporting oil prices at the moment. China's crude oil imports for September 2016 stood at 8.04 million barrels per day, a year-on-year increase of 18%. With falling domestic oil production and a robust demand, China's oil imports are all set to increase in the coming time. Even India imported a record 4.47 million barrels per day of crude oil in September, a year-on-year increase of 17.7%. Although Japan's crude oil imports were reduced by 4.6% in September, the latest trade data from Asia reveals that the markets are slowly returning to balance.

Takeaway for Investors

From the statements that Russia and Saudi Arabia's Energy Ministers are making, it must be noted that there is still a lot of uncertainty regarding the upcoming OPEC-Russia coordination on joint production cuts, and this factor will weigh in on oil prices in the coming time. Even the U.S. oil production decline is expected to slow down as per the EIA. On the other hand, rising oil imports from Asian players like China and India will support oil prices in the coming time. Considering all these factors, it can be seen that oil is indeed facing some resistance at $50 per barrel.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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