Digesting the OPEC+ Production Cuts

OPEC+ Agrees on Significant Output Cuts Amid Market Uncertainty

In a decisive move, OPEC+ members, led by Saudi Arabia, have agreed to substantial voluntary output cuts totaling about 2.2 million barrels per day (bpd) for early next year. This announcement, which emerged from the group's online meeting, has sent ripples through the global oil markets.

Market Reaction to Voluntary Supply Cuts

Despite the sizeable cut, benchmark global oil prices settled down by around 2%. This subdued reaction is attributed to the voluntary nature of the reductions and prior investor expectations of even deeper cuts.

The total curbs, amounting to 2.2 million bpd, include an extension of the existing voluntary cuts by Saudi Arabia and Russia of 1.3 million bpd. The additional 900,000 bpd of cuts include 200,000 bpd of fuel export reductions from Russia, with the rest being divided among six other OPEC+ members. Saudi Arabia, Russia, the UAE, Iraq, Kuwait, Kazakhstan, and Algeria are among the producers who have agreed to unwind these cuts gradually after the first quarter of next year, depending on market conditions.

Brazil Joins OPEC+, Boosts Bloc's Clout Amid Cut Skepticism

The meeting also focused on discussing output for 2024, amidst forecasts of potential market surplus and weaker economic growth. The decision to invite Brazil, a top 10 producer, to join OPEC+ signifies a strengthening of the group's influence in global oil production. Analysts interpret Brazil's entry as a move that could lead to significant management of new supply sources in the coming years. However, there is a general sentiment of skepticism regarding the full efficacy of these cuts.

Challenges Ahead: Implementation and Compliance

The key challenge lies in the implementation and compliance with these cuts. Questions remain about how these voluntary reductions will translate into actual production levels. Additionally, the market is closely watching the demand outlook, with factors like the U.S. economic situation and China's ongoing struggles influencing the global oil market.

As OPEC+ navigates these complex market conditions, its ability to stabilize and support oil prices through these voluntary cuts will be a crucial factor to monitor in the coming months.

Weekly Technical Analysis

Weekly January WTI Crude Oil

Trend Indicator Analysis             

The main trend is down according to the weekly swing chart. The main trend turned down the week-ending November 10th when sellers took out the last main bottom at $76.75. The trend will change to up on a move through $90.27. A trade through $93.92 will reaffirm the uptrend.

Retracement Level Analysis

The contract range is $38.49 to $92.21. Its retracement zone at $65.35 to $59.01 is the major support zone. This stopped the selling the week-ending March 24 at $64.37 and the week-ending May 5 at $65.00.

The intermediate range is $59.36 to $92.21. The market found support inside this zone at $74.82 to $71.17 for a second week. This is a value zone so holding this area will signal the return of buyers.

The first minor range is $64.27 to $90.27. Its retracement zone at $74.26 to $77.32 is potential resistance. The second minor target is a 50% level at $81.32.

Weekly Technical Forecast

The direction of the January WTI crude oil market the week-ending December 8 is likely to be determined by trader reaction to the retracement zone at $77.32 to $74.82.

Bullish Scenario

A sustained move over $77.32 will signal the presence of strong counter-trend buyers. If this creates enough near-term momentum then look for a test of the minor 50% level at $81.32. Since the main trend is down, sellers are likely to come in on a test of this level.

Bearish Scenario

A sustained move under $74.82 will indicate the presence of strong sellers. This could create the downside momentum needed to challenge the intermediate Fibonacci level at $71.17. This is a potential trigger point for an acceleration to the downside with $65.35 the next major target.

Short-Term Weekly Forecast

The short-term fundamental outlook for the oil market appears cautiously optimistic. While there is a general consensus that the cuts might be sufficient to keep the market balanced in the first quarter, the actual impact remains to be seen.

Analysts are particularly concerned about the demand side, highlighting expectations of high interest rates persisting in major economies and potential impacts on oil demand. The lack of clarity on individual country production targets adds to the uncertainty, leaving the market to ponder over the real implications of the announced cuts.

The market's technical outlook is complex. The market is in a downtrend, but it’s also nearing a major support zone, which some consider to represent a value area. This could lead to heightened volatility.

Traders looking to short into the $74.82 and $71.17 support range should be wary to avoid getting caught in a “bear trap”.

The key to a possible upward shift lies in how the market reacts to this support range. If the support fails, expect stronger selling pressure pushing prices down towards $65.35. However, a positive response from buyers on a test of this zone could trigger a massive short-covering rally, while bringing prices back above $80.00 a barrel.