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4 Major Catalysts That Could Quickly Stop The Oil Rally In Its Tracks

Summary

China demand for oil contracted last month - more to come.

Strengthening U.S. dollar putting pressure on oil.

OPEC ramping up production - in danger of further oversupplying market.

U.S. shale producers will complete more wells if price rises - putting downward pressure on oil prices.

It's evident that financial media are going to maintain a bullish narrative concerning oil, even though there are a lot of things that could easily and likely disrupt the rally. The current spin is we're very close to a rebalancing of the market, even though the data concerning oversupply remain in place.

There are a lot of threats to this weak rally, which is given the appearance of strength by continuing to report how much oil has rebounded from its bottom, which when measured in that manner is up about 75 percent from the low. The current price of oil doesn't look near as good when you start going further back.

The positive reporting will continue, but the reality is there are a lot of things in the market working against the rally, including the weakening demand from China, a stronger U.S. dollar, an increase in supply from some OPEC countries, and the inevitable boost in production from U.S. shale producers if the price continues to climb.

The China factor

There have been several interesting reports concerning China's oil sector recently, as its domestic production fell 5.6 percent in April, its demand for oil in March was down 1.6 percent, a new pipeline will be developed starting in June, and in April it imported oil at the second-highest level in its recorded history.

What needs to be understood about China is when the price of commodities plunge, it has a strategy of buying up large amounts of those commodities to stockpile them for the future. That is now happening with oil, which is starting to strain its storage capacity, one of the major negative catalysts having the most potential to stop the oil rally. China is the second-largest oil consumer behind the U.S., consuming a little over 11 million barrels per day on average. It produces just over 4 million barrels per day domestically.

In response to the growing storage crisis, China made a deal with South Korea to provide 3.5 million barrels to 5 million barrels of crude storage capacity; that is expected to be available in the second half of 2016. That will help a little, but it's a drop in the bucket for China's appetite for cheap oil.

China is silent on much of its oil business, but there can be no doubt it's approaching a capacity issue that will force it to curtail demand. That will have a significant impact on global demand in the near future.

Even now storage is full, and it is projected to take from 2 to 3 months to work through the existing inventory. On top of that teapot facilities are scheduled for maintenance this quarter, which will...


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