Oil finally closed above the psychological level of $70 per barrel last week following bullish demand news such as a 2.1-million-barrel drawdown in U.S. crude oil inventory for the week ended Sept. 14. The inventory decrease follows a 5.3-million-barrel reduction the week before and marks the fifth straight week of declines. The U.S. is not the only country drawing down on crude inventories to meet robust global demand. Saudi Arabia drew 5.5 million barrels of crude oil from storage in July, which is the most substantial reduction in eight months, to meet rising exports as production stagnates.
OPEC's Weekend Meeting
This week, traders and analysts will be going over the results of the OPEC+ meeting in Algeria that occurred over the weekend. Members met to discuss how best to implement their agreed production increase of 1 million barrels per day (mb/d) and whether to extend the deal beyond its expiry at year end. As always, the political balancing act of OPEC members remains challenging, especially for Iran, which is facing renewed U.S. oil export sanctions that will go into effect in November.
Iran has angrily responded to suggestions that OPEC could cut the country's production quota, allowing other OPEC members to increase production to maintain the cartel's overall production targets. Iran's oil minister vowed not to attend the weekend meeting to protest what the country views as an attempt by Saudi Arabia to take Iran's oil market share. Importers are already reducing purchases of Iranian oil ahead of the sanction deadline, with the country losing an estimated 900,000 barrels per day (b/d) of crude oil exports since April.
Brent Oil at $80 per Barrel
A major theme in the oil market is the disruption to Iranian exports from U.S. sanctions, leading many analysts to expect higher oil prices out to 2020. Last week, Saudi Arabia indicated that it is comfortable with Brent oil at $80 per barrel in the near term, suggesting that the Kingdom may be slow to replace lost Iranian barrels. One thing that may change this view, however, is an angry response from the U.S. Last week, President Trump again tweeted his dissatisfaction with high oil prices and put the blame at OPEC's door.
U.S. Secretary of Energy Rick Perry dismissed market concerns about a possible oil supply crunch, arguing that Saudi Arabia, Russia and the U.S. could add enough supply to the market to compensate for lost Iranian exports. The reassurance comes as Russia reports that its oil production in August reached a post-Soviet record high of 11.21 mb/d, and Morgan Stanley predicts that the global oil and natural gas industry could increase investment spending by 15% through 2020.
Improving Technical Picture
Oil managed to close above the psychological $70-per-barrel level last week but fell just shy of $71.13, which is the 61.8% Fibonacci retracement of the move from the early July highs to the mid-August lows. Closing above this level opens the door for a retest of $75 per barrel. On Friday, oil traded as high as $71.80 but was unable to consolidate these gains.
Other indicators are also in favor of the bulls this week. The 21-day exponential moving average is pulling away from the 55-day average, and the moving average convergence divergence (MACD) indicator remains above the neutral zero line on the daily price chart. Oil is also entering what traders call a Three Inside Up pattern on the weekly price chart. The pattern is a bullish reversal and occurs when the third candle closes above the second one in a standard Bullish Harami pattern.
Technical indicators across the board are also bullish on the daily price chart, with nine buy signals, no neutral signals and only one sell signal. Simple and exponential moving averages for all periods ranging from 5-day to 200-day are also bullish with uniform buy signals. Technical data on the higher-timeframe weekly price chart is even more bullish, with no sell signals, eight buy signals and three neutral signals.
Traders this week will be watching for oil to consolidate last week's gains and prepare for a possible retest of the $75-per-barrel price level in the weeks and months ahead.
Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment or trading advice. Oil price chart courtesy StockCharts.com.