Brent’s Sentiment Fueled By Potential Output Cut, But Bulls Should Exercise Caution

Oil carried forward its bullishness on Monday, extending the winning streak to three consecutive sessions after more and more signs of potential action by global oil producers to reduce output amid concerns over falling demand in 2017 and the comeback of U.S explorers and refiners.

Month to date, crude prices have rocketed by more than 10 percent thanks to Venezuela’s initiatives in reviving April’s output freeze talks which collapsed when Saudi Arabia backed away from the Doha talks after Iran refused to sign on. Venezuela’s President Nicolas Maduro stated on Friday that the country’s oil and foreign minister Eulogio Del Pino would visit oil-producing nations in an effort to reach a consensus over production limits ahead of September’s meeting. Also reported by Reuters, Russian Energy Minister Alexander Novak is in consultation with Saudi Arabia and other countries to “achieve oil market stability”.

However, this September’s meeting in Algeria is expected to be a second Doha as Iran is still ramping up production at this time, to surpass its pre-sanction production levels, and reclaim market share. Saudi Arabia always seems open to an agreement but the bigger question is whether the kingdom shall take part in a market stability deal without Iran’s concession?

A “promise” to freeze output by some OPEC and non-OPEC producers is considered to be a cure for oil prices which has been reeling in recent months near record lows amid slower global growth which has resulted in lower oil demand. However, going along with the rebound in crude prices, U.S. rig count and crude oil inventories are rising. Recent data has indicated that the rebounding oil price is encouraging producers to re-open rigs and that production is still outpacing demand.

Economists believe that even if the deal is reached, it would not have any impact on actual crude supply as Russia, Iraq, and Iran have reached their limit or are close to it, and Saudi output will go down anyway after the summer peak. Therefore, the remaining imbalance would not be affected significantly by this deal.

In the near term, investors will look for more signals from the supply side, especially from Iranian officials. Meanwhile, in the longer term, the global economy will be in focus after a batch of central banks have deployed additional stimulus measures lately to shore up growth, consumption and overall economic activity in their respective economies.

BRENT

Fig: BRENT D1 Technical Chart

Brent crude is on track to break through the 23.6% retracement level and head to a test of a key resistance level at $48.31. The commodity has moved past both the 20-period and 50-period moving averages at $45.07 and $46.23, respectively. The previous downtrend has been weakening as the ADX has plunged to 28.91 with +DI crossing over the –DI from below. RSI (14) also confirms the uptrend.

Trade suggestion

Buy Stop at 48.31, Take profit at 49.60, Stop loss at 46.50

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