U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading higher on Friday and for the week for a number of reasons, mostly affecting the supply side. The markets are being supported primarily by deeper-than-expected OPEC-led production cuts and the impact of U.S.-led sanctions on Venezuelan oil exports. Despite these moves, on a macro level, the global oil market remains well-supplied. Additionally, gains are being limited by weakening global demand.
Production Cuts Supportive
On the supply side, Saudi Arabia, the defacto leader of OPEC, said it cut daily production and exports by a further 500,000 barrels per day (bpd) on top of its agreed OPEC quota reduction. Since January 1, an OPEC-led group has been cutting at least 1.2 million barrels per day from production in an effort to trim the global supply and stabilize prices. On Tuesday, the Saudis said it had cut its output by almost 800,000 bpd in January to 30.81 million bpd.
The markets received a boost late in the week after Saudi Arabia said it would cut even more in March than it originally pledged. Russia said that it has cut its oil production by 80,000-90,000 barrels per day from its level in October, Moscow’s reference level for its cuts, the country’s energy minister said.
In the meantime, the political rift between Venezuela and the United States continues with the U.S. sanctions against the South American nation giving prices a slight boost.
Trade Deal Optimism
Traders are saying that positive chatter about the on-going high-level U.S-China trade negotiations in Beijing are helping to support prices because an end of the trade dispute should drive up crude oil demand for the world’s second largest economy.
Rising Chinese Imports Supportive
On Thursday, a trade balance report showed China’s crude oil imports in January rose 4.8 percent from a year earlier to an average of 10.03 million barrels per day (bpd). This marked the third straight month that imports have exceeded the 10 million bpd level.
U.S. Supply Capping WTI Gains
While the supply cut news has been especially bullish for Brent crude oil futures, the news from the U.S. government’s weekly inventories report wasn’t particularly bullish for WTI crude prices.
According to the U.S. Energy Information Administration’s weekly inventories report for the week-ending February 8, U.S. crude oil stockpiles rose last week to the highest since November 2017 as refiners cut runs to the lowest since October 2017.
Crude oil inventories built for a fourth week in a row, rising 3.6 million barrels to 450.8 million barrels in the week to February 8. Traders were looking for an increase of 2.7 million barrels.
Most analysts expect U.S. to rise past 12 million bpd soon, and perhaps even hit 13 million bpd by the end of the year.
IEA Not So Bullish
According to the International Energy Agency, the global oil market will struggle this year to absorb fast-growing crude supply from outside the Organization of the Petroleum Exporting Countries (OPEC), even with the group’s production cuts and U.S. sanctions on Venezuela and Iran.
Furthermore, the IEA said it expected global oil demand this year to grow by 1.4 million bpd, while non-OPEC supply will grow by 1.8 million bpd. This doesn’t bode well for the long-term crude oil bulls.
Brent and WTI Crude Oil Diverging
Brent crude oil continued to outperform WTI, hitting its highest level since November 21 while the U.S. contract remained below its early February high.
The spread between Brent crude oil and WTI crude oil has risen from a low of $6.80 on January 31 to a high of nearly $10.00. This is the result of a combination of the OPEC-led production cuts and the sanctions against Venezuelan exports, which are supportive for Brent crude oil, and the rising U.S. production, which is helping to limit gains for WTI crude oil.
Short-term, the crude oil market looks bullish, but as WTI and Brent futures contracts approach the 50 percent retracement levels from their October highs to their December lows, the rally should stall. This is because the market is still oversupplied.
Furthermore, I don’t think the objective of the OPEC production cuts is to drive the market to triple-digit highs, but rather to reach a fair price while balancing supply and demand. The fundamentals suggest Brent should average between $65.00 and $70.00 per barrel in 2019.
Technical Analysis of Weekly April WTI Crude Oil Market
(Click to enlarge)
The main trend is down according to the weekly swing chart. The market isn’t even close to changing the main trend to up. However, momentum is trending higher.
The minor trend is up. This move shifted momentum to the upside. A trade through $56.05 will reaffirm the minor uptrend. A trade through $51.62 will change the minor trend to down. This will also shift momentum back to the downside.
The short-term range is $43.00 to $56.05. If the short-term rally fizzles out then look for a pullback into its retracement zone at $49.53 to $47.99. This will occur when buyers decide not to chase the market higher and shift their focus to buying value.
The main range is $76.01 to $43.00. Its retracement zone at $59.51 to $63.40 is the primary upside target. Since the main trend is down, sellers are likely to show up on a test of this zone.
The market is likely to surge into $59.51 to $63.40 if there is a U.S.-China trade deal.
Technical Analysis of Weekly April Brent Crude Oil Market
The main trend is down according to the weekly swing chart. However, momentum is trending higher. The minor trend is up. A trade through $59.40 will change the minor trend to down. The minor trend is controlling the momentum.
The main range is $84.82 to $50.71. If the upside momentum continues then look for the rally to extend into its retracement zone at $67.77 to $71.79. Since the main trend is down, sellers are likely to re-emerge on a test of this area.
The counter-trend rallies in both WTI and Brent crude oil are being underpinned by the OPEC-led production cuts and the U.S. sanctions on Venezuela. This news along with positive developments over U.S.-China trade relations should be enough to drive prices into their respective retracement zones.
Once the zones are reached concerns over rising U.S. production should kick in, bringing an end to the upside momentum.