OPEC+ has stunned markets once again!
The alliance of oil-producing nations announced an unexpected supply cut of over 1 million barrels per day starting in May.
And as we know, when supply is lowered (ceteris paribus: all else equal), prices then rise.
And sure enough, Brent, the global benchmark for oil prices, surged by 6.5% on Monday – its largest single-day advance in 12 months!
And it’s adding to those gains today as well (Tuesday, April 4th).
From a technical perspective, Brent has now broken above the 23.6% Fibonacci resistance level from Brent’s March 2022 through March 2023 descent.
Oil bulls may well aim for the early-March cycle high at $86.52 as the next target.
The most obvious signal from this early-April shocker by OPEC+ is that the alliance would rather see prices back within the $80 - $90/bbl range that Brent adhered to between late-November and mid-March.
Recall how OPEC+ stood pat on its production levels during the months leading up to this recent surprise decision.
But once Brent fell through that range and touched a 15-month low, that was enough to spur OPEC+ into action.
This unexpected announcement over the weekend has even been enough to offset some of the downcast data out of the world’s two largest economies so far this week:
Such lower-than-expected figures speak to the sluggishness in the manufacturing sectors of the world’s two largest economies, and does not portend well for global oil demand moving forward.
Yet, Brent has not only been able to hang on to all of yesterday’s gains, but also build on it at the time of writing.
Referring to the chart above, note how in recent months, Brent has tended to pull back when its 14-day relative strength index (RSI) touches the 60 mark (refer to vertical blue dashed lines in above Brent price chart).
And that 60 line is below the textbook threshold of 70 which typically denotes “overbought” conditions.
Hence, with the 14-day RSI now at its highest since June 2022, while inching closer to the 70 mark …
that suggests that conditions may be ripe for a near-term pullback, if recent history proves to be a sound guide.
Also,, looking at historical data compiled by Bloomberg, Brent has tended to relinquish such sudden price spikes in the 20 days after making an initial session open of greater than 7%.
In fewer words, Brent may give up recent gains over the days and weeks ahead, if historical price action is repeated once more.
In the latest data, US crude stockpiles saw a drop for only the second time so far this year.
Another drop may point to robust demand for crude, which could underpin Brent’s recent gains.
Markets are now forecasting a month-on-month decline of 0.1%, in contrast to January’s 3.5% expansion.
As for the year-on-year comparison, February is expected to show a deeper drop of 2% compared to January’s 1.6% contraction.
Further signs of waning factory activity for the Eurozone’s largest economy may prompt oil prices to unwind some of its week-to-date gains following the OPEC+ shocker from over the weekend.
The US is forecasted to have added 240,000 new jobs in March, with the unemployment rate holding at 3.6%, while wage growth is expected to tick higher to 0.3% compared to February.
A better-than-expected nonfarm payrolls report, perhaps by way of a higher-than-expected headline number, or a lower-than-expected unemployment rate, or faster-than-expected wage growth, may however drag oil prices lower.
After all, traders and investors are only all too aware that such resilience in the US jobs market risks further underpinning still-stubborn US inflation, thus potentially inviting more demand-destroying rate hikes by the Federal Reserve.
Markets are widely expecting that OPEC+ would stand pat on its production levels at its weekend meeting.
2 June 13:21
Although on course for back-to-back weekly gains, oil’s advance for this week was significantly pared after Russia hinted that another OPEC+ supply cut may not be forthcoming at its early June meeting.
26 May 13:57
The global oil benchmark is on course to post a weekly advance of over 3%, ending a run of four straight weekly declines.
19 May 13:27
As mentioned in last Friday’s article, “Brent’s recent rebound is unlikely to be sustained …”. Sure enough, the global oil benchmark is unwinding some of its technical rebound, as demand-side fears continue to fester across markets.
12 May 12:21
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