Reports of smaller-than-expected OPEC+ output rise boost oil

Summary:

• OPEC+ members to meet this week

• Latest leaks suggest that 300-600k bpd production rise may be on cards

• From technical point of view Brent (OIL on xStation5) still remains in an uptrend

In 2016 world’s biggest oil producers agreed to cut output in order to shrink the commodity surplus on the market and elevate prices from their depressed levels. This decision turned out to be successful as the oversupply was limited and the prices advanced. However, this market may be now set to see deficit and this is what the upcoming OPEC+ meeting will be all about.

The Venezuelan crisis combined with the US sanctions levied on Iran pose a threat of destabilizing oil market. Keep in mind that those two countries accounted for about of 8% of global output in 2016. It’s true that the shale production in the US is constantly rising yet it may not be enough to offset the Iranian and Venezuelan output curb. Keep in mind that the global demand for oil is rising therefore if no action is taken the deficit that will surface may bring the oil prices back to their recent highs and even beyond. In such scenario the global growth may be put at stake given how important oil is to the modern world.

The global demand for oil has been rising over the past decades. A significant drop in supply can bite into global’s growth. Source: Bloomberg, XTB Research

To prevent such scenario materializing (and partially under pressure from Trump) the Saudi Arabia, together with Russia, proposed to boost oil output. The proposal suggested that a 1.5 million barrels a day rise in production could be at stake. This is the most likely reason behind correction we saw in the recent days. However, three producers (Iraq, Iran and Venezuela) expressed their reluctance towards the idea saying that “the market is stable and prices are good”. Moreover, they claimed that in case Saudi Arabia and Russia decide to boost output it would be a breach of a joint agreement. According to the report submitted by Bloomberg earlier today the OPEC+ members are said to be discussing an agreement that would deliver anywhere from 300k to 600k barrels per day over the course of the next few months. Such agreement could be considered a compromise yet it needs to be confirmed and we may have to wait for this until Friday. Nevertheless, we saw a huge turnaround on the oil market after the news went live causing oil to erase its early drop.

OIL managed to bounce from the mid term support zone and was additionally boosted by today’s news of a more modest increase considered by OPEC+. Source: xStation5

Taking a look at the OIL chart (Brent price underlying) we can see that after peaking a notch above the $80 handle the price reversed starting a minor downtrend. The price pulled back to the support zone ranging from $72.30 to $73.10 but the bears were unable to break below and in turn we saw a bounce up. The commodity is trading at the $74.50 handle at press time. Keep in mind that we have seen price reacting to this level several times over the course of the past two months (orange circles on the chart above) therefore traders should stay cautious as the story may repeat itself.

The largest correction still guards the current uptrend. A break below the $71.80 handle may signal a trend reversal. Source: xStation5

Taking a look on the OIL market from the broader perspective we can see that the recent high almost coincided with the 61.8% retracement level of the major slump started in 2014. From the technical point of view the market remains in an uptrend as the largest correction in the current trend (started mid-2017) has not been broken yet. Therefore as long as the price stays above the $71.80 handle the situation seems to bode well for buyers.