Crude prices surge to fresh 2016 highs

May 17, 2016

Brent and WT crude oil prices have sharply extended their advance to fresh 2016 highs on this first day of the new week by approx. 3 per cent each so far. According to Goldman Sachs, the oil market has gone from “nearing storage saturation to being in deficit much earlier” than they had expected. Goldman, like many other oil analysts, attribute the oil price recovery to robust demand from China and reduced production in the US, where bankruptcies in the industry are rife. In addition, temporary supply outages in places like Canada, Libya, Nigeria and Venezuela have all helped to offset higher oil production levels from the likes of Iran and Iraq. Furthermore, the surprisingly large 3.4 million barrel drawdown in US crude oil inventories last week has raised hopes that this may be the start of a period of sharp destocking as the US driving season shifts into a higher gear.

However, it is important to note that the recent supply outages are only providing a temporary boost to crude oil. If oil prices were to sharply extend their recovery, it will become profitable for the efficient shale producers to ramp up crude production once again. This will likely limit the gains for oil. I think that a price between $50 and $70 per barrel of oil would probably encourage these producers to increase output and we are not too far off this range now.

Technical outlook: WTI

But for the time being, the daily chart of WTI continues to point to higher oil prices: the US oil contract is stuck inside a bullish channel; the 21-day exponential and 50-day simple moving averages are both pointing higher, with the latter recently moving above the 200 to create a “Golden” crossover; several resistance levels have broken down and with ease, and the RSI indictor has consistently remained near 70, confirming the bullish momentum.  

In a further bullish development, WTI has moved above the recent resistance zone in the $45.80-$46.75 range today. Given the abovementioned technical reasons, the bears will clearly want to wait for their opportunity now as the breakout could encourage further momentum buying interest. The bulls meanwhile will first and foremost want to see WTI hold above the now broken $45.80-4$6.75 range. Some bullish speculators would no doubt prefer it if oil were to test the upper end of this broken range before potentially witnessing another rally. If seen, this would further confirm the breakout and may also provide fresh opportunities for those who had missed the breakout to jump on the bandwagon with relatively reduced risk (as opposed to chasing near these highs).

Going forward, there are a few key levels to watch ahead of the resistance trend of the bullish channel. These include the 61.8% Fibonacci retracement against the May 2015 high, at $48.60/5; the psychological level of $50 and the October 2015 high at $50.90. Some profit-taking around these levels should not come as a surprise given the extent of the rally. If seen, this would allow the RSI to once again unwind from the “overbought” levels of 70. Meanwhile a potential break back below the abovementioned $45.80-$46.75 range would be deemed a bearish outcome, which, if seen, could lead to a drop towards at least the support trend of the bullish channel.

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