Crude oil price: OPEC helps raise chance of bullish breakout

Crude oil prices have been on the rise as we kick off a new week, and this could be the start of a new surge thanks to a patient OPEC and falling US rigs.

OPEC Source: Bloomberg

Brent prices have been consolidating over the past two weeks, with the bullish breakout seen in late February providing a strong potential for further upside in the near future. Crude prices have been caught between the opposing forces of ongoing elevated US output, and restricted production throughout a host of the Organisation of the Petroleum Exporting Countries (OPEC)+ nations. Many had feared that OPEC would remove those restrictions at their meeting next month, with the prospect of rising production holding back prices given the incessant pumping in the US. However, things seem to have taken a backward step that could see oil prices rise over the near term.

Firstly, looking at OPEC+, the decision from OPEC+ nations to restrict output highlights a clear willingness to restrict revenues in order to stabilize prices back at a higher norm. To some extent that has worked, with Brent rising 32% since the December 2018 low. However, the question is whether such cuts can be sustained, with many such nations seeing their public finances strained given how reliant they are upon crude revenues. This week has seen the Saudi Energy Minister Khalid al-Falih essentially rule out an end to the production cut imposed by the group within the upcoming April meeting. That removes one major hurdle for crude bulls, with the next meeting taking place in June.

On the US side, there has been little let-up in crude production, with US President Donald Trump happy to see lower oil prices as a driver of economic growth and lower inflation. The chart below highlights how the International Energy Agency (IEA) sees future output growth taking shape, with the US expected to be central to any further growth in output.

IEA graph

IEA graph

Interestingly, amid all this talk of higher US production, we saw a notable decline in the US rig count throughout the start of 2019. With the rig count seen as a key proxy for investment in future crude production it comes as no surprise to have seen a sharp rise in crude prices around its release on Friday. While we are yet to see any deterioration in actual output, this fall in rigs could point towards future weakness in US production.

From a charting perspective, the consolidation seen throughout the past two weeks provides us with a clear breakout possibility. The inverse head and shoulders formation completed in February points towards another surge higher; especially if we see the market retest and respect that $63.75 neckline as new support. That has been the case thus far, therefore, it is worthwhile watching for a break throughout the $67.12 resistance level as a precursor to a bullish drive in stock prices. Conversely, a break below $63.75 would signal a more bearish picture coming into play as we retrace part of the rally from $59.41.

Brent crude chart

Brent crude chart


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