November West Texas Intermediate crude oil futures traded mostly sideways this week as investors shrugged off production and inventories numbers in anticipation of a decision on Friday to extend or perhaps deepen production cuts by OPEC and non-OPEC producers.
Oil ministers from OPEC and other producers led by Russia are currently discussing a possible extension to the current agreement under which producers are cutting output by 1.8 million barrels per day (bpd) until March 2018.
Some traders also believe the group will discuss deepening the production cuts and the monitoring of exports to assess compliance with the deal. This suggests that some believe the deal is working to trim production and stabilize prices while others are still suspicious about compliance.
At the start of the meeting on Friday, OPEC Secretary-General Mohammad Barkindo said that all factors in the oil market pointed to headwinds ahead for U.S. shale oil producers.
Additionally, Russian Energy Minister Alexander Novak said on Friday that OPEC and the other producers needed to continue coordinated action and work on a strategy from April 2018.
Earlier in the week, traders said there would be some focus on whether Nigeria and Libya, who have been exempt from the curbs, will join any future cuts.
The most optimistic scenario would be an agreement to extend the production cuts, a deepening of the cuts and a new deal to include Libya and Nigeria in the program. This scenario would send price soaring.
However, the price action this week and especially on Friday suggests that bullish traders may not get what they desire. Some analysts are saying that nothing bullish may come out of this meeting.
Goldman Sachs, for example, said that the talks in Vienna were “noteworthy but premature,” adding “we believe it is unlikely that the committee will recommend extension cuts this week.”
Additionally, the chief market strategist at CMC Markets in Sydney predicted there will be “strong rhetoric but whether or not they will be able to boost prices from current high levels is another question.”
The price action and order flow this week seems to be reflecting both bullish and bearish camps. This explains the sideways price action. The charts seem to be giving investors the choice to buy strength and chase the market higher or play for a pullback into a support zone.
The price action, marked by the consistent straddling of a key technical level at $50.59 all week indicates that investors are split as to whether the meeting will bring fresh supply cuts to the table.
Traders seem to be waiting for a signal that will suggest a drop in supply is coming. This would create the upside momentum needed to maintain the developing uptrend. Until this happens, we’re likely to see more sideways trading and price drift.
In other news this week, the Energy Information Administration (EIA) reported on Wednesday that U.S. crude production reached 9.51 million barrels per day in the week-ended September 15, up from 8.78 million bpd a week ago.
The inventories data is still skewed because of Hurricanes Harvey and Irma. Some U.S. refineries aren’t even working at elevated capacity levels yet. Until the numbers start to come out in line with expectations, traders are going to continue to rely on outside events like the OPEC meeting to fuel the price action.
Weekly November West Texas Intermediate Crude Oil
(Click to enlarge)
The main trend is up according to the weekly swing chart. It turned up last week for the first time this year when buyers took out the previous top at $50.62. This week buyers drove the market into $51.11 before prices retreated.
The $0.49 breakout through the previous top suggests the buying has been tentative and may not even have been real. The breakout and change in trend may have been fueled by buy stops and short-covering which is the worst kind of breakout for bullish traders.
In order to sustain a breakout, buyers must come in with conviction and the market should not break back under the breakout level. This week, the market failed both tests which strongly suggests investors are not buying strength and may prefer to play for a pullback into support.
The main range is $58.37 to $42.80. Its retracement zone is $50.59 to $52.42. This zone acted like resistance this week which may be one reason why we saw a weak extension on the breakout over $50.62.
In order to attract new buyers at current price levels, buyers are going to have to form a support base over the 50 percent level at $50.59. If they can do this then they may create enough upside momentum to trigger a rally into the Fibonacci level at $52.42 and the main top at $52.62. The latter is another trigger point for an acceleration to the upside.
If buyers fail to hold the market over $50.59 then start preparing for a correction into the short-term retracement zone at $48.63 to $48.04. A test of this value zone could draw the attention of news buyers.
Simply stated, if OPEC delivers bullish news then look for prices to take off over $50.59 with potential near-term targets at $52.42 and $52.62.
If the OPEC meeting fails to produce fruit then look for a sustained move under $50.59 to drive the market into $48.63 to $48.04.