Oil prices extend rally on OPEC+ and Saudi Attack news

In this article we look at the recent spike in oil prices, supply and demand drivers as well as where the oil price may be headed next.

Oil prices extend rally on OPEC+ and Saudi Attack news

Crude oil prices have continued to rally over the weekend, with Brent and West Texas Intermediate (WTI) reaching their highest levels in more than a year.

News that Organization of Petroleum Exporting Countries and Allies (OPEC+) have agreed to maintain output curbs, despite the pickup in demand, started the short-term extension of oil price gains. These gains been further amplified by news of an attack on Saudi Arabian oil facilities. Saudi Arabia, the largest OPEC oil producer, has been subject to a missile attack from Yemen’s Houthi forces. Fortunately there were no casualties from the attack and there appears to be no disruptive damage to facilities at this point.

Oil prices continue to see positive demand side catalysts

The rollout of Covid-19 vaccines, most significantly in the world’s largest economies, namely: the combined Euro Area (including the UK), the USA and China, has prompted the suggestion of reflation and growth returning to the market place, which is being reflected in oil prices at present.

Recent US employment, retail sales, durable goods and crude stockpile data has supported the notion of an improving economy and increasing demand for the commodity. China, a major importer of oil, and the only major economy to have etched out a full year of gross domestic product (GDP) growth in 2020 is also revising its growth forecasts higher which in turn assumes more demand as well.

OPEC+ continue to curb oil supply

The OPEC+ have (early in the new year and reinforced last week) reiterated their commitment to keeping oil prices supported by the curbing or maintenance of existing output reductions already in play. The OPEC+ decision looks to see an oil deficit maintained in 2021. Recent suggestions from member and non-member firms have been that there has been a strong level of compliance with regards to the allocated curbs in effect, and that a sustained and substantial pick up in demand will need to be witnessed before supply curbs are unwound.

Brent crude oil – technical analysis

The longer-term price trend for the price of Brent crude oil remains up, as indicated by the channel drawn on the chart above. Recent news has driven the price to channel resistance.

Circled blue we see the price now showing a short-term bearish reversal signal (bearish engulfing) off channel resistance. The reversal off resistance is accompanied by the overbought signal circled red.

While the reversal off resistance and overbought signals are short-term bearish indications, the longer term trend remains up. Traders respecting the uptrend might prefer to wait for weakness to play out before finding long entry into Brent crude. Aggressive traders might hope to find long entry on a reversal at the $66.60 support level, while more conservative traders might hope for a deeper pullback towards trend line support at $62.50 for long entry.

In summary

  • Gains in the oil price have been extended on supply curb affirmation from OPEC+ and news of a military strike in Saudi Arabia
  • US data and Chinese economic activity evidence increasing demand for oil from the two largest economies in the world
  • Production curbs are said to be met with high levels of compliance amongst OPEC+ members
  • A technical analysis view of Brent crude oil suggests that the longer term trend to be up, although traders might prefer looking at a short term pullback from overbought conditions to find long entry

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