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Only Sentiment Matters: Why Oil Prices Are Heading Up Until November

Rig

Crude oil prices are on a tear. They have recently reached a new 52-week high, and considering the momentum behind the markets, it is likely that the elusive breakout above $52 a barrel, the mark that provided resistance earlier, will be crossed.

There are various periods in the markets when the fundamentals don't determine the price, rather it is sentiment that drives prices higher or lower. Similar to the $20 and $15 a barrel call when crude prices were falling, the $55 or $60 a barrel mark is the touted figure for crude oil these days.

Will prices reach those levels? They certainly can.

When the sentiment is right, every piece of bad news becomes good news, and prices rise on weird justifications. We will analyze the technical picture of oil a little later, but let's first look at the fundamentals and understand whether oil prices should be where they are today.

OPEC production hits a record, the highest since 2008

While OPEC's report shows that the oil production rose to 33.39 million barrels per day (bpd), IEA estimates that OPEC production is at 33.64 million bpd. That's a difference of 350,000 bpd. It's interesting to note that the OPEC nations are disputing the production levels shown in the OPEC report.

While Nigeria says that they have produced less than what the report says, other memebers such as Saudi Arabia, Iraq, and Venezuela contest that they have produced more than the figures mentioned in the report. Iran, on the other hand, has refused to divulge any figures.

Everyone who will be involved in freezing or cutting production wants to ensure that they produce at the highest possible levels now, so that in the Novemeber meeting they can do away with nominal cuts. And when the OPEC reporting is being contested by its own members, what numbers will be considered legitimate when trying to ensure that production is limited to 32.5 to 33 million bpd, even if agreed to in the November 30 meeting?

“Negotiating individual country quotas will likely reignite tensions in the group and the growing discrepancies between official and third party production estimates are a cause for concern,” noted BMI Research.

Russia also pumping at record levels

Russia is all set to join the OPEC nations in their quest to stablilze the markets after President Vladimir Putin pledged his support to a production freeze. However, Russia too pumped to a new record of 11.11 million bpd in September—a new post-Soviet high. Related: Oil Executives Have Little Appetite For Deepwater Drilling

Just days after Putin's statement, Igor Sechin, the head of Rosneft, Russia's largest producer, which produces around 40 percent of the nation’s crude, said that they will not join the OPEC in the production freeze. Not only that, he also said that Rosneft could increase production this year by another 4.1 million bpd above what it produced in 2015.

“The Americans want it most [$50 per barrel] as the shale oil projects become profitable with such a price. And $60 will [only] result in more shale oil projects,” Sechin told Reuters, reports Hellenic Shipping News.

The U.S. continues to increase number of oil rigs

The U.S. oil rigs that were dropping out of production at an alarming pace have started to return at an equally strong pace, considering that oil prices have only recently crossed the $50-a-barrel mark.

“The U.S. [oil] rig count has steadily risen over the past weeks, to totals not seen since February,” said Daniel Holder, commodity analyst at Schneider Electric, adding that since June, oil producers have added over 100 rigs, ending up last week at 432, reports Market Watch.

All these new rigs will increase U.S. oil production and will negate any deficit, if at all, that will be created by the OPEC agreement to freeze production.

What are the statements that are being considered as positive?

"Market forces are clearly working after a testing period of sub-$30 oil prices... Oil demand is expanding at a healthy rate despite slower global growth," said Saudi Arabian Energy Minister Khalid al-Falih, reports Fox Business.

This is in contrast to what the IEA has forecast. Instead of the demand increasing, they have downgraded their expectations of a demand increase from 1.4 million bpd to 1.2 million bpd for the next year.

Apart from these, Iran, Libya and Nigeria are free to increase production, and all the three have indicated their willingness to do so.

Whichever way the math is done, fundamentally, there is greater supply than demand, yet crude oil prices are rising. Let’s see the technical picture.

(Click to enlarge)

The chart above shows that crude oil recently broke out of an equilateral triangle, which gives it a pattern target of $61 a barrel, which also happens to be the next overhead resistance.

A break above the $52 a barrel mark also completes an inverted Head and Shoulders pattern, which has a pattern target of $76 a barrel. Related: Gazprom Feels The Pressure Of Low Gas Prices

So technically, both pictures point to a strong bull move in crude oil prices. However, the breakout above the $52-a-barrel mark will have to be sustained for higher levels to be achieved.

In February of 2015, the markets had attempted a rally, but failed. So the current breakout from the resistance will face a few smaller resistances until we see $54 a barrel.

With roughly six weeks to go until the November OPEC meeting, oil prices are likely to trend higher. Any dip will be a buying opportunity, as the OPEC members will speak up prices should they fall.

Whether the prices sustain after the November 30 meeting is a big question. Until then, oil traders should keep buying all the dips and close their positions close to $54 a barrel.

By Rakesh Upadhyay for Oilprice.com

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