Does The OPEC+ Oil Price Rally Have Legs?

U.S. West Texas Intermediate crude oil futures are up sharply late Thursday and for the week after OPEC and its allies (OPEC+) agreed to tighten global supply with a deal to cut production targets by 2 million barrels per day (bpd), the largest reduction since 2020.

The agreement comes ahead of a European Union Embargo on Russian oil and would squeeze supplies in an already tight market, adding to inflation, according to Reuters.

Saudi Energy Minister Abdulaziz bin Salman said the real supply cut would be about 1 million to 1.1 million bpd. Saudi Arabia’s share of the cut is about 0.5 million bpd.

Biden Administration Calls OPEC+’s Decision Shortsighted

The White House said President Joe Biden would continue to assess whether to release further strategic oil stocks to lower prices.

“The President is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of (Russian President Vladimir) Putin’s invasion of Ukraine,” the White House said.

U.S. Crude and Fuel Stockpile Drawdowns Provide Additional Support

U.S. crude oil, gasoline and distillate inventories fell last week, the Energy Information Administration said on Wednesday.

Crude inventories fell by 1.4 million barrels in the week ended September 30 to 429.2 million barrels. Analysts in a Reuters poll had expected a 2.1 million-barrel rise.

U.S. gasoline stocks fell 4.7 million barrels in the week to 207.5 million barrels, its lowest level since November 2014, the EIA said, compared with analysts’ forecasts for a 1.3 million-barrel drop.

Distillate stockpiles, which include diesel and heating oil, fell 3.4 million barrels in the week to 110.9 million barrels, versus expectations for a 1.4 million-barrel drop, the EIA data showed.

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis        

The main trend is down. However, momentum has shifted to the upside following the confirmation of the closing price reversal bottom from the week-ending September 30.

A trade through $75.70 will negate the chart pattern and signal a resumption of the downtrend. A move through $95.55 will change the main trend to up.

The minor trend is also down. A trade through $88.83 will change the minor trend to up. This will confirm the shift in momentum.

Retracement Level Analysis

The main range is $60.20 to $110.78. The market is currently trading on the bullish side of its retracement zone at $85.49 to $79.52, making it support.

The minor range is $95.55 to $75.70. Its 50% level at $85.62 is additional support.

The short-term range is $110.78 to $75.70. With momentum shifting to the upside, its retracement zone at $93.24 to $97.38 becomes the primary upside target.

The contract range is $34.75 to $110.78. Its retracement zone at $72.77 to $63.79 is the next major downside target and value zone.

Weekly Technical Forecast

The direction of the December WTI crude oil market the week-ending October 14 is likely to be determined by trader reaction to the main 50% level at $85.49.

Bullish Scenario

A sustained move over $85.49 will signal the presence of buyers. This could lead to a quick test of the minor top at $88.83. Overtaking this level will indicate the short-covering rally is getting stronger. If this move generates enough upside momentum then look for a surge into the retracement zone at $93.24 to $97.38. Inside this zone is the main top at $95.55.

Taking out $95.55 will change the main trend to up, while a move through $97.38 is likely to trigger an acceleration to the upside.

Bearish Scenario

A sustained move under $85.49 will indicate the presence of sellers. This could trigger a quick break into the main 61.8% level at $79.52.

The Fibonacci level at $79.52 is also a potential trigger point for an acceleration to the downside with the first target the contract’s 50% level at $72.77.

Short-Term Outlook

The Biden administration is upset with OPEC+’s decision to cut supply, which means we’re likely to see some kind of action from the U.S. to keep prices from rising. U.S. President Joe Biden said, “There are a lot of alternatives. We haven’t made up our minds yet.”

The White House also indicated it would continue to assess whether to release more supplies from the Strategic Petroleum Reserve and would consult Congress on other ways to reduce market control of OPEC and its allies.

Both sides have spoken. OPEC+ wants to stabilize prices at higher levels, while the U.S. wants to drive down prices to keep the pressure on inflation. This leads me to believe that the current rally will be capped somewhere between $90 and $100 per barrel.

A rally into this zone will be just right for OPEC+, but terrible news for the Biden administration, which wants to see crude oil prices and inflation falling just weeks ahead of the November elections.

Even if the U.S. makes aggressive moves to drive down oil prices, it may be too late to have any major affect before November. Furthermore, OPEC+ is likely to cut output again if prices fall too far, too fast.

We’re looking for a rally into $93.24 to $97.38 next week. Sellers could come in on a test of this zone because of technical factors, but overtaking the upper level could trigger an acceleration to the upside.