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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Oil Rises On OPEC’s Production Decision


U.S. West Texas Intermediate is trading higher on Friday after OPEC and other major oil producers agreed on oil production levels starting from July. The intraday spike to the upside actually changed the main trend to up on the daily chart.

According to reports, the allied partners will aim to increase production to about 1 million barrels per day (bpd). However, reports went on to say that this figure represents about two-thirds of Saudi Arabia’s initial request.

Traders are saying the cartel settled on the 1 million barrel figure because some OPEC members would be unable to sufficiently ramp up crude production. Therefore, the increase in output may actually turnout to be between 600,000 to 800,000 bpd.

The rally on Friday is being fueled by short-covering, position-squaring and some speculative buying because some traders had been pricing in a little more than a 1 million barrel increase. Furthermore, OPEC is not expected to actually release a hard target, but many traders expect the real figure to remain well-below the 1.8 million barrels already being removed from the market.

Another reason for the bullish response is that recent figures show that production has fallen recently by about 2.8 million bpd so even with a 1 million barrel increase, there is still going to be a shortfall in the market.

Additionally, Saudi Energy Minister Khalid al-Falih said Friday morning that no-one should expect to see an “immediate flood” of oil coming back onto the market following the meeting. This news is also short-term bullish.

Al-Falih also warned the world could face a supply deficit of 1.8 million bpd in the second half of 2018 and that it was OPEC’s responsibility to alleviate consumers’ concerns. This means that OPEC doesn’t want to be responsible for driving prices so high as to cause a global economic slowdown.

Prices are likely to remain volatile even after OPEC’s decision because the trade conflict between the U.S. and China could escalate. Oil traders fear that Beijing could impose a 25 percent duty on U.S. crude imports. If this occurs then American oil would become uncompetitive in China, forcing the large importer to seek buyers elsewhere. This could dampen any rally and even extend recent losses in the market.

The Fundamentals

According to the EIA, U.S. crude inventories fell by 5.9 million barrels in the week-ending June 15, traders were looking for a draw of 2.1 million barrels.

Gasoline stockpiles rose by 3.3 million barrels, while inventories of distillate fuel, jumped by 2.7 million barrels, the EIA reported. Implied demand for both fuel types weakened by more than 550,000 barrels per day.

Additionally, in a sign of strong demand, U.S. refineries processed a seasonal record of 17.7 million barrels per day (bpd) of crude oil last week, according to the EIA.

Weekly U.S. production remained at a record 10.9 million bpd.

Also supporting prices was a drop in Libyan supplies due to the collapse of an estimated 400,000-barrel storage tank. This news helped widen the spread between Brent crude oil and WTI crude oil.

Technical Analysis

(Click to enlarge)

The main trend is up according to the monthly swing chart. There wasn’t much of a change on the monthly chart after the OPEC deal was announced.

A trade through $72.70 will negate the bearish chart pattern and signal a resumption of the uptrend. The market is in no position to change the monthly trend to down, but there is plenty of room for a correction.

The main range is $89.45 to $39.88. The market is currently trading inside its 50% to 61.8% retracement zone at $64.67 to $70.51. This zone is controlling the longer-term direction of the market.

The minor range is $45.08 to $72.70. Its retracement zone target is $58.89 to $55.63.

Technical Forecast

(Click to enlarge)

Based on this month’s price action, the direction of the August WTI crude oil market is likely to be determined by trader reaction to the 50% level at $64.67.

A sustained move over $64.67 will indicate that buyers are still coming in to support the oil market. If this creates enough upside momentum then look for the rally to possibly extend into $70.51 then $72.70.

A sustained move under $64.67 will signal the presence of sellers. This could trigger an acceleration to the downside with $58.89 to $55.63 the next major downside target.

While the monthly chart remains the same, the daily and weekly chart have changed.

The new main range on the weekly chart is $72.70 to $63.40. Its 50% to 61.8% retracement zone at $68.05 to $69.15 is the major upside target. This zone will control the near-term direction of the market.

Since the main trend is up, aggressive counter-trend sellers are going to try to stop a rally on a test of this zone. This are going to try to form a secondary lower top, which is usually the first sign that the selling is greater than the buying at current price levels.

It will also put the market in a position to retest $63.40 which could lead to a change in trend to down on the weekly chart.

On the upside, overtaking $69.15 and establishing new support at $68.05 will indicate the presence of buyers. If volume returns on this move, we could see an eventual rally into $72.70.

So essentially, we’re looking for prices to strengthen on a sustained move over $69.15 and to weaken on a sustained move under $68.05.

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