Crude prices rise as OPEC production slides

OPEC production cuts look set to continue, with further Brent and WTI price strength expected

OPEC Source: Bloomberg

Crude prices have broken to a new four-month high this week, with both Brent and WTI breaking through key resistance levels. This raises the likeliness of a bullish phase, with the past month seeing oil largely trade in a consolidation pattern. The fundamental picture for crude remains one which is geared towards OPEC+ and US production, with the recent focus being placed upon whether Saudi Arabia will insist on an extension to the previous production cuts from Organisation of the Petroleum Exporting Countries (OPEC) and their partners. This question will rear its head once more this month, when OPEC meet up once again to decide whether to extend the current cuts. Markets are widely expecting to see the group maintain current levels until their June meeting, yet we are likely to see sensitivity over output levels raised over the coming weeks.

Crucially, we are seeing OPEC maintain their promise to a large extent, with the group posting a fourth month of lower output, with overall production falling to the lowest level since 2015.

Key to those shifts were the declines in output from Saudi Arabia and Venezuela in particular. The Saudi decline is particularly notable as this highlights a likely willingness to continue on the current path beyond this upcoming meeting as a means to drive prices higher. On the Venezuelan situation, we have seen precious few signs that the political situation is going to improve, with President Nicolás Maduro cracking down on opposition by removing the parliamentary immunity from opposition figurehead Juan Guaidó, raising the likeliness of a politically charged arrest. With Maduro backed by the usual duo of Russia and China, there is little change that we will see Western involvement for now, meaning that any shift towards a more stable and open economy is far off. The nation holds the highest crude reserves in the world, and as long as Maduro remains in power, we will see less, and less output hit the market (largely thanks to US sanctions).

On the topic of US output, we have seen investment trail off somewhat, with US rig count falling to the lowest level in a year. US output is certainly more flexible and market orientated than most OPEC members, meaning that rising prices should drive output higher. However, we are yet to see that come to fruition and the focus is instead upon falling OPEC production levels.

Looking at the chart, we can see the clear breakout throughout the $68.53 level in Brent, paving the way for a rally into the 200-day simple moving average (SMA). There is a chance we could soon see a pullback, yet any such move would be perceived as a buying opportunity as long as we do not see the price fall below $65.95.

Brent daily chart

Brent daily chart

The four-hour chart highlights this recent breakout, where a break below the breakout level of $68.53 would point towards a retracement phase coming into play. Until then, further upside looks likely from here.

Brent 4hr chart

Brent 4hr chart


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