- Oil prices are recovering after a sharp sell-off on Thursday amid mixed news from OPEC+ members.
- Russia’s Novak says output cuts are unlikely, while Saudi Arabia’s oil minister appears to suggest otherwise.
- The US dollar is correcting and giving oil a pullback after a strong recovery.
Oil The price steadied on Friday after the previous day’s plunge as traders weighed conflicting news from OPEC+’s two biggest members and American dollar weakens. Russian Deputy Prime Minister Alexander Novak said he did not think more cuts would be announced, after just days earlier Saudi Oil Minister Prince Abdulaziz bin Salman appeared to suggest otherwise. The next OPEC+ meeting is on June 4.
At the time of writing, WTI crude is trading in the upper $72s and Brent crude is trading in the upper $76s.
Oil news and market drivers
- Russia’s Novak plays down the idea of production cuts, saying: “I don’t think there will be any new steps, because just a month ago certain decisions were made regarding the voluntary reduction of oil production by some countries…”
- This appeared to contradict comments by Saudi Oil Minister Prince Abdulaziz bin Salman, who said on Tuesday that speculators (interpreted by the media as short sellers) should “beware”, apparently implying that OPEC+ may announce cuts.
- Abdulaziz defended OPEC’s decision to cut production by 2 million barrels per day (bpd) at its October 2022 meeting. With the oil price at similar levels to October, it further suggests a possible supply cut in June.
- US Dollar Recovers After Core Personal Consumption Expenditure (PCE) data for April – the US Federal Reserve’s preferred gauge of inflation – showed inflation rising to 4.7% year-on-year in April and 0.4% month-on-month compared to expectations, both of which were lower by a basis point.
- Durable goods data is coming with mixed consumer durables rising 1.1% in April versus the consensus estimate of a 1.0% decline. However, durable goods ex Defense and ex Transport fell when they were expected to rise.
- The lack of traction in US debt ceiling talks is weighing on oil prices as it raises the specter of a US default, triggering a global recession.
- However, past experience points to a high probability that the two sides will agree on a last-minute deal that will act as a bullish catalyst for oil.
Oil Technical Analysis: Triangle Formation Signals End of Downtrend?
From a technical point of view, WTI crude oil is in a long-term downtrend and is gradually reaching lower lows. Given the old adage that the trend is your friend, this favors short positions over long positions. WTI crude oil is trading below all major daily simple moving averages (SMAs) and all weekly SMAs except the 200-week, which is at $66.90.
US WTI crude oil: daily chart
The right-angled triangle has likely ended as price has recovered from the YTD low of May 4 as shown by the dotted lines on diagram above.
There is a possibility that the triangle will break in either direction, but it is biased to break higher because the top edge is very flat (it is right-angled). A break above could see the price rally in a volatile rally to a potential target at $79.70, calculated using the usual technical method of taking 61.8% of the triangle height and extrapolating from the breakout point above. Oil price could even go as far as 100% extrapolation in bullish cases, however, the 61.8% level roughly coincides with the 200-day SMA and the main bearish trendline, increasing its importance as a key resistance level.
Assuming the price of oil reaches its target, a bullish breakout would also mean that the price broke the lower high of $76.85 on April 28, challenging the dominant bearish trend.
Three green bars in a row to represent a rally this week and the tentative breakout above the top of the triangle that accompanied Wednesday’s rally are bullish. It suggests that there is still a chance that the price could recover after Thursday’s sell-off and possibly continue to rise.
Like the triangle, the long hammer Japanese candlestick pattern that formed at the May 4 lows (and from today) is an indication that this could be a key strategic bottom.
A slight bullish convergence between price and the Relative Strength Index (RSI) at the March and May 2023 lows – with price making a lower low in May that is not offset by a lower RSI low – is a sign that bearish pressure is easing.
This means that until the price of oil actually climbs above the $76.85 mark, the downtrend is dominant and there is still a possibility that the price of WTI oil could break out lower. Confirmation would require a decisive piercing below the bottom of the triangle, targeting $67.27, which is just above where the 200-week SMA is located and is likely to offer good support. Traders may even wish to wait for a break below the wave B triangle lows at $69.40 for further confirmation.
US WTI Crude Oil: Weekly Chart
A break below the year-to-date (YTD) lows of $64.31 would be needed to restart the downtrend, with another target around $62.00, where the 2021 lows will come into play, followed by support at the 57 level. 50 USD.
Frequently asked questions about Brent oil
What is Brent crude oil?
Brent crude oil is a type of oil found in the North Sea that is used as a benchmark for international oil prices. It is considered “light” and “sweet” due to its high weight and low sulfur content, making it easy to refine into gasoline and other high-value products. Brent crude oil serves as the reference price for approximately two-thirds of the world’s internationally traded oil supplies. Its popularity rests on its availability and stability: the North Sea region has a well-established oil production and transportation infrastructure that ensures a reliable and consistent supply.
What factors affect the price of Brent crude oil?
As with all assets, supply and demand are the key drivers of Brent crude oil prices. As such, global growth can be a driver of increased demand and, conversely, weak global growth. Political instability, wars and sanctions can disrupt supply and affect prices. Decisions by OPEC, the group of major oil producing countries, are another key driver of the price. The value of the U.S. dollar affects the price of Brent crude oil because oil is traded mostly in U.S. dollars, so a weaker U.S. dollar can make oil more affordable and vice versa.
How does inventory data affect the price of Brent crude oil?
Weekly reports on crude oil inventories published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) influence the price of Brent crude oil. Inventory changes reflect fluctuating supply and demand. If the data shows a decline in inventories, it could mean increased demand pushing up the price of oil. Higher inventories may reflect increased supply, which is pushing prices down. The API report is published every Tuesday and the EIA the day after. Their results are usually similar and fall within 1% of each other 75% of the time. EIA data is considered more reliable because it is a government agency.
How does OPEC affect the price of Brent oil?
OPEC (Organization of the Petroleum Exporting Countries) is a group of 13 oil-producing countries that meet twice a year to jointly decide on production quotas for member countries. Their decisions often influence Brent crude oil prices. When OPEC decides to cut quotas, it can tighten supply and push oil prices up. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten other non-OPEC members, the most prominent of which is Russia.