Expect A Correction As Oil Reaches ‘Profit Targets’

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are grinding higher at the end of the week as they head toward major upside objectives. If reached, traders will have major decisions to make since these objectives are often viewed as profit targets. Short-sellers are likely to vigorously defend these areas in an effort to form secondary lower tops, while aggressive counter-trend buyers are going to try to drive the market through these areas.

Driving prices higher is OPEC and its ally's quest for a balanced market. Saudi Energy Minister Khalid al-Falih said on Wednesday he hoped the oil market would be balanced by April and that there would be no gap in supplies due to the U.S. sanctions on OPEC members Iran and Venezuela.

The current price action suggests WTI and Brent may reach balance points on the charts as early as next week and this could attract new sellers.

Supply Cut Driven Rally

Crude oil is being primarily underpinned by output cuts from top producers, as well as sanctions on OPEC members Iran and Venezuela. Secondary support is being provided by the hopes of a trade deal between the United States and China, and a strong rally in the equity markets.

Additional Help from Nigeria

On Wednesday, a spokesman for President Muhammadu Bhuari said in a statement that Nigeria is willing to reduce output to help secure higher prices. Nigeria made the announcement after being called out by Saudi Arabia because of its failure to adhere to the OPEC agreement to reduce production. In January, Nigeria pumped well above the quota it previously agreed to.

U.S. Production Slows Rally

Although the OPEC-led supply cuts are helping to trim the global supply overhang and stabilize prices, the current rally is being slowed by expectations of inventory builds in the United States amid surging shale production to record highs.

According to the U.S. Energy Information Administration (EIA), U.S. crude oil production reached 12 million barrels per day (bpd) for the first time last week.

Rising production is also leading to a larger inventory build. According to the EIA, U.S. commercial crude oil inventories rose by 3.7 million barrels to 454.5 million barrels in the week-ending February 15.

After the EIA report on Thursday, analysts at Citi said, "We see total U.S. crude production hitting 13 million bpd by year-end, with 2019 averaging 12.5 million bpd. Citi further added, "We could be seeing some weeks with 4.6 million bpd of gross crude exports by end-year, adding to this week's new record" of 3.6 million bpd.

With supply and demand nearing a balance point, there may not be that much more upside potential in the markets. Goldman Sachs said on Thursday that surging U.S. supply likely means that expected non-OPEC supply will grow by 1.9 million bpd this year, more than offsetting the OPEC cuts.

That means much will depend on demand, which Goldman said it expected to grow by 1.4 million bpd this year.

Fundamental Forecast                      

The story remains the same. The OPEC-led supply cuts and the Venezuelan sanctions are working to trim supply and that is helping to support the rally. U.S. production continues to slow the rally and at times puts an actual cap on gains.

The wildcard remains a U.S.-China trade deal. Reaching a deal could be bullish for crude oil prices if it leads to increased future demand.

Technical Analysis

Weekly April West Texas Intermediate Crude Oil Analysis

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The main trend is down according to the weekly swing chart, however, momentum is trending higher. After several weeks of nearly sideways-to-higher trading, the market is finally starting to accelerate to the upside as it nears its primary upside target.

The main range is $76.01 to 43.00. If the upside momentum continues then look for the rally to extend into the major retracement zone at $59.51 to $63.40. Profit-takers could come in on the initial test of this area.

The current short-term range is $43.00 to $57.81. On the downside, the best target zone is $50.41 to $48.66. This is also a value zone so a test of this area will likely attract new buyers.

The market is currently trading on the bullish side of a downtrending Gann angle. This angle has been dropping $1.00 per week since the main top at $76.01 from the week-ending November 5. Next week, this angle drops in at $55.01. Continuing to hold over this angle will indicate strong upside momentum.

Weekly May Brent Crude Oil

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The main trend is down according to the weekly swing chart. However, momentum is trending higher.

The main range is $84.48 to $51.00. Its retracement zone and primary upside target is $67.74 to $71.69. This zone is very important to longer-term structure of the market. It is controlling the longer-term direction of the market. Since the main trend is up, sellers could show up on a test of this zone.

For eight weeks, the May Brent crude oil futures contract has been guided higher by a steep uptrending Gann angle. Next week, the Gann angle rises to $69.00. In order to maintain the current upside momentum of $2.00 per week, the market is going to have to continue to settle above this angle. If it fails to hold this angle then upside momentum could slow, signaling the presence of sellers, or a let up in buying.

Technical Forecast

Brent crude oil continues to be the leader, having reached its retracement zone objective ahead of the WTI futures contract.

Buyers are going to be facing a major decision this week if the Brent contract moves inside its retracement zone at $67.74 to $71.69. The key decision area for WTI traders is $59.51 to $63.40.  Sellers could come in on a test of these zones because they are major technical objectives.