Oil “minds the support.” Focus shifts to Algiers summit next week

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OPEC

Abdalla Salem El Badri -Secretary-General, Organization of the Petroleum Exporting Countries (OPEC). Image Via World Economic Forum

Summary:

  • Oil prices bounced off the support at 43 – 43.50 from last week
  • EIA inventory report now shows three consecutive weeks of drawdown
  • OPEC and Russia prepare for Algiers summit next week
  • Venezuelan President Maduro earlier this week sounded optimistic of reaching an agreement, after meeting with Iran President Rouhani
  • Saudi and Iran officials met in Vienna on September 22nd to prepare for talks. No outcome on the talks yet
  • Oil traders doubtful if OPEC and Russia can reach a production freeze deal
  • Oil chart shows a technical pullback to 44.50 region
  • Mind the weekly inverse head and shoulders in Oil, with neckline resistance at 50.00 – 51.80

Oil prices posted a healthy gain after the previous week saw prices tumbling to a 5-week low with the EIA inventory report failing to move the oil markets last week. This week, oil prices gained on the back of a weaker US dollar after the Fed maintained the status quo and the weekly oil inventory report showed another drawdown which surprised forecasters.

Crude oil futures for November delivery closed yesterday at $46.08 a barrel, marking an 8-day high. The EIA’s weekly inventory report showed a larger than expected drawdown in oil inventories, to the tune of 6.2 million barrels for the week ending September 16th. In total, US commercial stockpiles were recorded at 504.6 million barrels and marked the lowest inventory level since February this year, but overall stockpiles remain significantly higher compared to a year ago.

EIA Crude Oil Inventory (Sep 16, 2016): -6.2 million (Prev.: -0.55million)
EIA Crude Oil Inventory (Sep 16, 2016): -6.2 million (Prev.: -0.55million)

S&P Global Platts research firm said “Relatively strong refinery activity for this time of year has put downward pressure on crude stocks.”

Algiers summit next week

OPEC member countries and Russia will be meeting next week on the sidelines of the Algiers 15th International Energy Forum oil summit (Sep 26 – 28). Earlier this week, pre-summit chatters saw Venezuela president Maduro making a bold statement after the discussions with his Iranian counterpart, Rouhani. Maduro said that OPEC countries were closer to reaching an agreement of oil production freeze with Iran also coming on board. “We had a long bilateral meeting with Rouhani. We’re close to a deal between OPEC producer countries and non-OPEC,” Maduro said, as the news helped support oil prices early on in the week.

Still, there is a lot of skepticism on the outcome of the meeting with the Doha incident still fresh in trader’s minds.

Matt Smith, director of commodity research at Clipperdata said, “Russia, Saudi Arabia et al discovered earlier this year that jawboning has a marked impact on market sentiment. [Even if that jawboning doesn’t rally prices] it serves to unwind financial positioning that may be skewed bearish.”

Yesterday, September 22nd, Saudi and Iran officials met in Vienna for a second day to prepare for a wider group talks in Algiers but no agreement was reached, according to anonymous reports to Bloomberg. Despite the outcome, the markets view this meeting as important as the two rivals have often failed to see eye to eye on oil production freeze.

“This time, we believe that the environment is more conducive to some type of deal,” Helima Croft, head of commodity strategy at RBC Capital Markets LLC said, indicating that there could still be some optimism left on the outcome of next week’s summit.

Crude Oil – Where to from here?

The reversal in oil prices this week, should the bullish momentum hold up could signal early signs of a reversal for a larger leg in the rally. We are very interested in the weekly crude oil chart which shows that the price reversal near 43.00 marks the right shoulder of the inverse head and shoulders pattern. The neckline resistance at 50.00 – 51.80 remains the immediate challenge. A breakout here could see oil prices very likely to extend gains for a minimum target of $70.00 a barrel.

Crude Oil (Rolling contract) – Inverse head and shoulders, weekly chart
Crude Oil (Rolling contract) – Inverse head and shoulders, weekly chart

On the 4-hour chart time frame, prices are currently pulling back after briefly hitting the 46.50 handle. Support is seen at 45.00, but a deeper retracement could see oil prices test the 44.50 – 44.00 support. To the upside, the immediate resistance at 47.50 – 47.00 remains the target. The bullish view on oil can be invalidated on a daily close below the 43.00 support low from where prices bounced off earlier this week.

Oil Chart, H4 Time Frame: Pull back to support at 45, or 44.50 – 44.00
Oil Chart, H4 Time Frame: Pull back to support at 45, or 44.50 – 44.00

With the summit looming and oil prices already making a steady gain, next week’s meeting should not be taken as a binary event. OPEC and Russia has the advantage of surprising the markets and coming out with an agreement to curb production. With the Doha event serving as a reminder, the upside risks of being caught off guard are plenty.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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