Oil Capped Until OPEC Brings Evidence Of Output Cuts

U.S. West Texas Intermediate crude oil finished 2016 higher in what can best be described as a tumultuous trade. After a break early in the year, the market stabilized to trade sideways for several months before posting a strong rally into the end of the year after OPEC and other OPEC Non-members agreed to cut production on January 1 in order to reduce the global supply glut and stabilize prices.

We expected to see a firm opening this week as investors were likely to respond positively to the official start of the deal agreed by OPEC and non-OPEC members to reduce output by about 1.8 million barrels per day.

Adherence to the program will likely be difficult for some members give the past history of such deals. Therefore, OPEC will start monitoring the results only three weeks after its start. On January 21-22, the cartel and several non-members will meet in an effort the monitor adherence to the program and to address any problems that have arisen since it started. This is going to tell us a lot about whether the program will succeed.

I expect prices to be underpinned throughout the month because of optimism over the production cuts, but I'd be surprised by a huge breakout to the upside until we can see if the program is gaining traction.

Market gains could be capped in January by the rising U.S. Dollar and U.S. production.

Technical Analysis

Weekly March West Texas Intermediate Crude Oil

(Click to enlarge)

The market followed my weekly March WTI crude oil chart so well last year that I decided to bring it back.

From the chart, we can see that the main trend is up according to the daily swing chart. This is proven by the series of higher-tops and higher-bottoms. Based on this chart, the main trend will turn down on a trade through the last swing bottom at $44.49.

A trade through $56.24 will signal a resumption of the uptrend. This could generate the upside momentum needed to challenge the next main top at $56.59.

The top at $56.59 is the trigger point for an acceleration to the upside with the next major top coming in at $54.84.

The short-term range is $35.59 to $56.24. Its 50% to 61.8% retracement zone is $45.92 to $43.48. This will be the primary downside target should there be a sharp sell-off.

The main range is $90.82 to $35.59. If there is a huge breakout to the upside then its retracement zone at $63.21 to $69.72 will be the primary upside target.

The Intermediate Range

We now know the major support and major resistance targets. However, based on the current price at $55.04, I think it's more important to know the intermediate range since this is where the market has spent most of its time the past six months.

The intermediate range is $65.78 to $35.59. Its retracement zone is $50.69 to $54.25. Trader reaction to this zone will dictate the near-term direction of the market.

To be more specific, based on the price action this week, I believe that trader reaction to $54.25 will tell us whether the market is being controlled by the bulls or by the bears.

Moving forward this month, I believe a bearish tone will be set on a sustained move under $54.25. This is likely to lead to a sideways to lower trade with $50.69 the next major support target.

If March WTI crude oil can sustain a move over $54.25 then this will signal the presence of buyers. At first these buyers will be in place to prop up the market, but over time, their presence may build enough upside momentum to take out $56.24. And you can see on the weekly chart that there is plenty of room to the upside.

The weekly chart indicates there is likely to be a labored break if sellers prevail because of the number of support points. It also shows that the way of least resistance is up.