Investors long of oil breathed a collective sigh of relief this week as prices extended their rebound from 9% to 14%, having fallen 18% from mid-April to early May (fresh 6-month lows). With US crude back at $50/barrel and Brent Crude at $53.5, we spy positive technical trading signals that bode well ahead of what is a key event for the commodity.

That event is the half-yearly OPEC meeting (25 May) where markets have high hopes that the oil producing cartel will agree to at least an extension of 6-month production cuts which expire end-June. It has already been reported that Saudi Arabia (OPEC mouthpiece) and Russia (non-OPEC but 2nd largest global producer behind SA) might be in favour of a 9-month extension. Maybe even bigger cuts too.

With still rising US production complicating matters, delaying OPEC’s efforts to rebalance an over-supplied global market, a 6-month rollover is the very least markets will welcome. Any longer than 6 months and/or increase to cuts, would likely boost oil prices further. There’s every possibility we repeat the flirts with $55/58 in Jan/Feb when cuts began. However, there are risks.

After multiple disappointments and delays in arriving at an agreement late last year, there is potential for other OPEC members to highlight how efforts have thus far have been largely in vain. After all, they were designed to get oil prices well off their lows to help oil-reliant nations which were suffering.

US production, however, continues to rise, frackers and shale producers capitalising on lower break even prices. This is a reward for staying the course and innovating when prices hit mid-$20s lows 18-months ago, a far cry from the $100+ that attracted them to the game 2011-14. If anything, lower OPEC-led production buoying prices merely makes US producers even more profitable, encouraging even more back to the party. More nimble, they have become the de-facto swing producers.

Positive rhetoric is good to hear, though, as we move towards the OPEC meeting. But don’t forget we’ve been here before, several times in fact last year. Admittedly during the very complex build up to the initial agreement, when certain players were playing silly buggers, but the set-up has hallmarks. All still have to agree.

So beware too much hype ultimately offering little more than a simple rollover. Then again, prices are at least on the rise again. And perhaps OPEC & Co. has learnt a harsh lesson from last year after causing so much volatility. There is far less talk from every OPEC minister and his dog this time. Maybe we’ll get a case of under-promise and over deliver?

As for those technical signals. Firstly both US Crude and Brent have broken back above their 61.8% Fibonacci retracement levels of the April declines, meaning the next major level is 100% and thus a full retracement to the $54/56.8 highs of last month. Secondly, both oil benchmarks are holding solid uptrends, perhaps a little ahead of themselves, but solid all the same and it is likely that recently overcome resistance will turn supportive for any pullback. Thirdly, the US Dollar index is its weakest in almost six months. Faith in delivery of US stimulus policies is waning, with a knock-on to US growth expectations. The Fed might not be in a position to keep tightening US monetary policy which may see the dollar give up more ground, making USD-denominated commodities like Oil even cheaper.

If you want to keep abreast of the oil market and its knock-on for commodities (energy, metals) and equities (e.g. BP, Shell) get permanent access to our research here. Complement this with a trial of our excellent trading service for tailored market updates and you’ll appreciate why we were recently voted Best CFD Research Service and have retained the Best CFD Provider title for nine straight years.

As always, enjoy your weekend,

Mike van Dulken, Head of Research, 19 May 2017