Will crude continue to climb?

With Brent crude having hit a two-year high this week, it is worth looking into whether this bull run can continue as we head towards the November OPEC meeting.

Oil pump
Source: Bloomberg

The price of crude oil has been rampantly rising over recent months, with Brent rising 42% since the June low. This incessant rise has been grounded in a number of factors, with the Organisation of Petroleum Exporting Countries (OPEC) led production cuts being largely respected, as demand rises to account for growing US output. With both OPEC and non-OPEC producers set to meet on November 23, there are talks underway to ensure agreement for another extension to the already long-lasting production freeze.

The previous experiences of those members involved in the production freeze will likely provide the basis for another extension, given the proof that the strategy is finally working. The current tones from initial negotiations point towards an extension to the current production limits, which provide a basis for further upside.

The story from the US is a mixed one, with production at a new record high, yet a rig count which is on the decline. That rig count data typically acts as a leading indicator of where production will go in the future, highlighting the potential for output to begin slowing in the coming months. That being said, with crude prices on the rise, there is more, not less, of an incentive to pump for US oil and gas firms. This could be related to cash flow factors, with exploration firms requiring increased capital to enable further drilling. As such, keep an eye out for the rig count, with a resurgence likely to provide the basis for further gains in production. Conversely, should we see US production begin to taper off, it is clear that investment is on the wane.

From a charting perspective, there is a clear medium-term bullish bias since we broke through the $58.48 mark. That provided us with the first monthly higher high since 2011. Many will perceive this as an inverse head and shoulders formation. It is certainly a telling occurrence, and likely highlights that the $27.43 mark represents the bottom of this multi-year sell-off. It also points towards the potential for substantial further upside, with $69.24 the next major resistance level up ahead.

The daily chart highlights the more recent price action, with the June-August retracements moving back into 61.8%. Meanwhile, more recent gains have seen more minimal pullbacks. Given the fact that we have seen the price rising so sharply of late, it is likely we are set for another medium to shallow (<61.8%) retracement. However, for now, we have seen little to tell us that this trend is over.

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