In spectacular fashion, crude oil traders went from discussing bearish factors such as storage containment issues to celebrating forecasts calling for supply shortages, in less than a week.
U.S. West Texas Intermediate moved higher for a fourth session on Friday, putting it on track for a weekly gain of about 10%, after Saudi Arabia pressed allies to stick to production quotas and banks including Goldman Sachs predicted a supply deficit.
WTI crude oil is set for its strongest weekly performance since early June after Hurricane Sally cut U.S. production and OPEC and its allies laid out steps to address market weakness.
Lower Gulf of Mexico Production and another Tropical Storm Brewing
In the Gulf of Mexico, U.S. offshore drillers and exporters began a "clear-up" on Thursday after Hurricane Sally weakened to a depression and started rebooting idle rigs following their closure for five days.
Meanwhile, a tropical depression in the western part of the Gulf of Mexico could become a hurricane in the next few days, potentially threatening more U.S. facilities.
OPEC+ Leaders Strongly Urge Compliance
The Organization of the Petroleum Exporting Countries (OPEC) and other producers in OPEC+ are currently cutting 7.7 million bpd of output and the group stressed at a meeting on Thursday that it would take action against members not complying with the deal. This news is leading some traders to speculate that OPEC+ will put on hold plans to taper…
In spectacular fashion, crude oil traders went from discussing bearish factors such as storage containment issues to celebrating forecasts calling for supply shortages, in less than a week.
U.S. West Texas Intermediate moved higher for a fourth session on Friday, putting it on track for a weekly gain of about 10%, after Saudi Arabia pressed allies to stick to production quotas and banks including Goldman Sachs predicted a supply deficit.
WTI crude oil is set for its strongest weekly performance since early June after Hurricane Sally cut U.S. production and OPEC and its allies laid out steps to address market weakness.
Lower Gulf of Mexico Production and another Tropical Storm Brewing
In the Gulf of Mexico, U.S. offshore drillers and exporters began a "clear-up" on Thursday after Hurricane Sally weakened to a depression and started rebooting idle rigs following their closure for five days.
Meanwhile, a tropical depression in the western part of the Gulf of Mexico could become a hurricane in the next few days, potentially threatening more U.S. facilities.
OPEC+ Leaders Strongly Urge Compliance
The Organization of the Petroleum Exporting Countries (OPEC) and other producers in OPEC+ are currently cutting 7.7 million bpd of output and the group stressed at a meeting on Thursday that it would take action against members not complying with the deal. This news is leading some traders to speculate that OPEC+ will put on hold plans to taper the cut down to 5.8 million bpd…when the entire group convenes again in December.
Additionally, the Saudi Arabian energy minister said those who gamble on oil prices would be hurt "like hell".
Prince Abdulaziz told the gathering OPEC+ could hold an extraordinary meeting in October if the oil market soured because of weak demand and rising coronavirus cases, according to an OPEC+ source.
"Anyone who thinks they will get a word from me on what we will do next, is absolutely living in a La La Land…I'm going to make sure whoever gambles on this market will be ouching like hell," Price Abdulaziz told a news conference when asked about OPEC+ next steps.
He said OPEC+ would take a proactive and pre-emptive stance in addressing oil market challenges.
Investment Banks Turn Bullish
Bullish speculators may have jumped on board on Thursday, helping to push prices even higher, after Goldman Sachs predicted the market would be in a deficit of 3 million barrels per day (bpd) by the fourth quarter and reiterated its target for Brent to reach $49 by the end of the year and $65 by the third quarter of 2021.
Meanwhile, Swiss bank UBS also pointed to the possibility of undersupply in the oil market, forecasting Brent would rise to $45 a barrel in the fourth quarter and $55 by mid-2021.
Other News
Earlier in the week, the International Energy Agency (IEA) reduced its forecast for oil demand this year on Tuesday, because of a cautious outlook for the economic recovery from the pandemic. That came after OPEC said it expected world oil demand to fall more sharply than earlier forecast.
Additionally, imports in August in Japan, the world's fourth-biggest importer of crude, fell by more than a quarter from a year earlier, official data showed.
These potentially bearish events may have been offset by Wednesday's government report that showed U.S. crude stockpiles unexpectedly fell last week despite rising production.
Crude inventories fell to their lowest since April at 496 million barrels in the week to September 11, sliding 4.4 million barrels, compared with analysts' expectations in a Reuters poll for a 1.3 million-barrel rise.
Production rose for a second consecutive week, jumping 900,000 barrels per day of crude last week, to 10.9 million bpd, the data showed.
Weekly Technical Analysis
Weekly December WTI Crude Oil
Trend Indicator Analysis
The main trend is up according to the weekly swing chart, however, momentum is trending lower. A trade through $44.33 will signal a resumption of the uptrend. A move through $25.31 will change the main trend to down. Another rally next week will make $37.11 a new main bottom and raise the trigger point for a change in trend.
The main range is $59.51 to $25.31. Its 50% to 61.80% retracement zone at $42.41 to $46.45 is the major resistance.
The minor trend is down. This is controlling the momentum. A trade through $37.11 will signal a resumption of the minor trend. A trade through $44.33 will change the minor trend to up and shift momentum to the upside.
The minor range is $44.33 to $37.11. Its 50% level at $40.72 is controlling the near-term direction of the futures contract. Based on Friday's price action, this level will start as support next week.
The short-term range is $25.31 to $44.33. If the main downtrend continues then look for the selling to possibly extend into its retracement zone at $34.82 to $32.58.
Weekly Technical Forecast
Based on this week's price action, the direction of the September WTI crude oil market is likely to be determined by trader reaction to the minor 50% level at $40.72.
Bullish Scenario
A sustained move over $40.72 will indicate the presence of buyers. This could lead to a quick test of the long-term 50% level at $42.41. Overtaking this level will put the market in a position to take out the main top at $44.33. This could trigger an acceleration into the major Fibonacci level at $46.45.
Bearish Scenario
A sustained move under $40.72 will signal the presence of sellers. The first downside target is the minor bottom at $37.11. If this fails then look for the selling to possibly extend into the short-term retracement zone at $34.82 to $32.58.
Short-Term Outlook
The big question that needs to be answered is, "Are we looking at a short-covering rally or have new buyers re-entered the market?" That question should be answered by trader reaction to the major 50% level at $42.41.
Given the bearish IEA report, it's hard to believe the Goldman Sachs' forecast. Furthermore, without a vaccine against COVID-19, it's hard to see demand returning until next year.
We expect to see heightened volatility over the near-term because clearly the fundamentals are bearish, but the relatively cheap price level hit the previous week was attractive enough to bring in the speculative buyers.
It looks like we're in for a classic battle between fundamental traders and speculators. Additionally, the emergence of hurricanes in the Gulf of Mexico will continue to be the wildcard. Hurricane season doesn't officially end until November 1.