Here’s the latest from the Oil Price:
‘Crude oil sentiment is shifting in a bullish direction, with OPEC+ cuts and a growing list of serious outages taking supply off of the market.
‘Saudi Arabia recently signaled that it would slash its production to just 9.8 million barrels per day (mb/d), or about 0.5 mb/d more than required under the OPEC+ deal. That would take Saudi production down to close to a four-year low, a sign that Riyadh is aggressively trying to push up oil prices.
‘That is significant, especially since Russia is not really carrying its weight. Russia cut output by 42,000 bpd in January, according to Bloomberg, only about one-sixth of its promised 230,000 bpd reduction as part of the deal.’
The fundamentals are looking bullish for crude oil. Outside OPEC and Russia’s production issues, tensions are building in Venezuela. Although no one knows how much oil will be removed from the market, the country’s political issues are worsening. That’s causing production delays.
It’s a safe bet crude production losses will rise in the country.
Plus, with Iran sanctions hitting its production profile, crude oil output is slowing world-wide.
The supply story isn’t looking good. But, what about demand?
It comes down to economic growth…
The big picture story
CNBC wrote yesterday:
‘Bank of America Merrill Lynch said in a note that the Sino-American trade dispute was hurting economic growth globally.” Addressing global trade tensions is key for improving the economic outlook,” it said in a note.
‘China’s vice premier and chief trade negotiator, Liu He, and U.S. Trade Representative Robert Lighthizer lead a round of trade talks this week in Washington.
‘Considering the economic outlook and supply and demand balances, the bank said it expects Brent prices to average between $50 and $70 per barrel, “anchored around $60.”’
Bank of America Merrill Lynch is sitting on the fence. It says crude will trade in a wide range, which has happened for the past two months. That’s standard investment bank analysis, mind you.
The big banks tend to go with the trend. If prices are up, they are often bullish. If they’re down, they are normally bearish. That shouldn’t shock you. Their analysts want to keep their jobs. If they stick their necks out and get a call wrong, the banks could lose business…and that could be the end of their career.
In the real world, when it comes to crude oil demand, US–China trade talks are driving the story. You might not expect it. But with hopes of a deal on 1 March, when another US$200 billion of tariffs hit China, crude prices have pushed higher in recent days. It’s a big turnaround from last week, when I wrote the following in Markets & Money:
‘…while it’s too early to know, crude might have made a formal low in late-December. It could be in the process of re-rating higher. Mind you, the current bounce seems to be slowing.
‘Crude oil MUST close above US$64 per barrel to move higher.
‘I’m leaning towards it happening, if a US-China trade deal happens on 1 March. The coloured channels show that crude oil remains in an uptrend, after all. A closing above US$64 per barrel…would confirm our bullish thesis.’
Crude prices surprisingly closed above US$64 per barrel last week. It happened sooner than expected. That suggests the crude bulls are in favour. With that in mind, take a look at latest daily chart for Brent crude oil ― the international oil price:
Crude oil broke through the pink uptrend channel last week. That’s bullish. But will the breakout become a false move? I don’t think it will. But, with the chance of crude surprising the bulls, I believe it could re-test the top of the pink channel before moving higher. That’s a normal technical analysis move, mind you.
It’s called a ‘bullish re-test’…
I would love to see this move play out.
It would support our bullish investment thesis.
With the crude bulls in control today, there’s plenty of support underneath the market. Crude oil hasn’t been able to crack it either. That suggests underlying strength. For example, the upper pink line acted as resistance in 2016 and 2017. That level has become first-level support for the next bounce.
I expect we will see a ‘bullish re-test’, after all.
At the end of the day, crude oil must hold US$64 per barrel on a monthly basis. If that happens, we could see a gigantic bounce in the months ahead. There’s some resistance around current prices, with major resistance at US$70 level (not shown on chart). I’d love to see a weekly closing above this level.
I’m not getting to excited yet, however…
Remember, US–China trade talks are driving crude oil story for now. A trade deal should send crude prices skyrocketing; where a no-deal should push crude prices lower. In that case, despite the story favouring the bulls today, a daily closing below US$57 would be bearish and something to keep in mind.
The bottom line: don’t ignore the downside risks ahead of US–China trade talks on 1 March. If they are positive, crude oil prices could explode higher. That’s good news if you own crude oil stocks. But if they aren’t, we must keep in mind crude could take a turn for the worst.
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