Crude Prices Surge to Fresh 2016 Highs
Brent and WTI crude oil prices have sharply extended their advance to
fresh 2016 highs on this first day of the new week by approx. 3 per cent
each so far. According to Goldman Sachs, the oil market has gone from
“nearing storage saturation to being in deficit much earlier” than they
had expected. Goldman, like many other oil analysts, attribute the oil
price recovery to robust demand from China and reduced production in the
US, where bankruptcies in the industry are rife. In addition, temporary
supply outages in places like Canada, Libya, Nigeria and Venezuela have
all helped to offset higher oil production levels from the likes of
Iran and Iraq. Furthermore, the surprisingly large 3.4 million barrel
drawdown in US crude oil inventories last week has raised hopes that
this may be the start of a period of sharp destocking as the US driving
season shifts into a higher gear.
However, it is important to note that the recent supply outages are only
providing a temporary boost to crude oil. If oil prices were to sharply
extend their recovery, it will become profitable for the efficient
shale producers to ramp up crude production once again. This will likely
limit the gains for oil. I think that a price between $50 and $70 per
barrel of oil would probably encourage these producers to increase
output and we are not too far off this range now.
Technical outlook: WTI
But for the time being, the daily chart of WTI continues to point to
higher oil prices: the US oil contract is stuck inside a bullish
channel; the 21-day exponential and 50-day simple moving averages are
both pointing higher, with the latter recently moving above the 200 to
create a “Golden” crossover; several resistance levels have broken down
and with ease, and the RSI indictor has consistently remained near 70,
confirming the bullish momentum.
In a further bullish development, WTI has moved above the recent
resistance zone in the $45.80-$46.75 range today. Given the
abovementioned technical reasons, the bears will clearly want to wait
for their opportunity now as the breakout could encourage further
momentum buying interest. The bulls meanwhile will first and foremost
want to see WTI hold above the now broken $45.80-4$6.75 range. Some
bullish speculators would no doubt prefer it if oil were to test the
upper end of this broken range before potentially witnessing another
rally. If seen, this would further confirm the breakout and may also
provide fresh opportunities for those who had missed the breakout to
jump on the bandwagon with relatively reduced risk (as opposed to
chasing near these highs).
Going forward, there are a few key levels to watch ahead of the
resistance trend of the bullish channel. These include the 61.8%
Fibonacci retracement against the May 2015 high, at $48.60/5; the
psychological level of $50 and the October 2015 high at $50.90. Some
profit-taking around these levels should not come as a surprise given
the extent of the rally. If seen, this would allow the RSI to once again
unwind from the “overbought” levels of 70. Meanwhile a potential break
back below the abovementioned $45.80-$46.75 range would be deemed a
bearish outcome, which, if seen, could lead to a drop towards at least
the support trend of the bullish channel.
