Oil In A Historic Rally As Supply Side Dominates – Can Prices Breach One-Year Highs?

Oil prices rose on Wednesday, prolonging their rally to a sixth consecutive trading day on the back of OPEC’s decision to snap output and falling U.S crude oil stocks. The Hurricane Matthew, which hit Haiti and Cuba on Tuesday and is now heading towards the U.S east coast, has wiped out the effect of a strengthening U.S dollar on oil prices.

U.S crude stockpiles are likely to record the fifth straight week of declines, after the weekly report from the American Petroleum Institute (API) late on Tuesday showed that U.S. inventories dropped by 7.6 million barrels. The U.S. government’s Energy Information Administration (EIA) will report official stockpile numbers later today, which are forecast to indicate an increase following weeks of drawdowns.

Venezuelan Oil Minister Eulogio Del Pino, in an e-mailed statement Tuesday, stated that an agreement to cap output among OPEC and non-OPEC oil producers could slash global supply by 1.2 million barrels a day. According to Minister Del Pino, besides the total amount of 700,000 bpd trimmed by OPEC’s members (the maximum agreed amount under the accord worked out last week in Algiers), non-OPEC states might reduce production by another 500,000 bpd. The deal could consequently boost oil prices by $10 to $15 a barrel above the average September price, he said.

As reported by a Bloomberg survey, OPEC output was at a record of 33.75 million bpd in September, up 170,000 bad compared to the previous month. The increase stemmed from the resumption of supplies from Libya and Nigeria, along with a ramp up in production from Iran.

The Iranian State news agency Islamic Republic News Agency reported on Sunday that Iran plans to increase exports to 2.35 million bpd in coming months from about 2.2 million bpd currently. The country aims to raise output to pre-sanction levels of 4 million bpd to regain market share. But market analysts said that in order to boost export capacity to 4 million bpd from the current level of nearly 3.7 million bpd, Iran would need more assistance in the form of foreign investment into its production infrastructure.

In the next formal meeting of OPEC members in November, non-OPEC oil producers such as Russia and Azerbaijan have also been invited to discuss output curbs. Russia, the world’s largest energy exporter, is widely expected to coordinate a meeting with Saudi Arabia, some time this month, to discuss oil production.

As stated by the U.S. National Hurricane Center, Hurricane Matthew is heading for the U.S. and may hit Florida’s Atlantic coast on Thursday/Friday. The storm is likely to reach the New York Harbor – the delivery point for NYMEX contracts, and may disrupt fuel shipments.

OIL Technical Analysis


Fig: BRENT D1 Technical Chart

After a period of time trading around the 23.6% level at 46.73, Brent crude sky-rocketed to move past both the moving averages, the psychological $50 mark, and a major resistance level at 51.45. The commodity is heading northwards to the highest levels seen since October 2015. The high at 52.82 recorded in June is the highest the market has traded since October 2015 and is a critical mark for the market, in its attempt to create a serious breakout for the medium/long term. The stochastic chart is currently indicating that the Brent market has stepped into the overbought zone. It shall be interesting to monitor the price action to evaluate whether the market can successfully aim for and break through the near term target at 52.82.

Trade suggestion

Buy Stop at 51.85, take profit at 52.82, stop loss at 51.00

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