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Crude Oil Prices Eyeing $100 Mark on Strong Demand, Geopolitical Tensions

Crude Oil Prices Eyeing $100 Mark on Strong Demand, Geopolitical Tensions

Margaret Yang, CFA, Strategist

CRUDE OIL OUTLOOK: BULLISH

  • Crude oil prices extended an eight-week rally amid demand optimism and supply constraints
  • Prices are further boosted by heightened geopolitical tensions at the Ukraine border
  • WTI is trending higher within an “Ascending Channel”, bringing the $100 in sight

Crude oil prices extended an eight-week rally as traders mulled heightened geopolitical risks surrounding the Russia-Ukraine border this week after US warned about a potential invasion. A flurry of diplomacy over the weekend failed to alleviate market concerns about potential supply disruptions, as Ukraine serves as a key transit hub of oil and gas between Russia and the European Union. Further escalation of the dispute may lead to US and European sanctions on Russian oil exports, strengthening prices further.

WTI has breached above the $95 mark and Brent is trading at $96 – their highest levels since 2014. It looks like prices are heading towards the $100 mark should geopolitical tensions continue to drive near-term term demand for the commodity. Meanwhile, elevated oil prices may feed into inflationary pressure, urging the Fed and other central banks to consider tightening monetary policy sooner to rein in rising price levels.

Demand for oil has been on the rise this year as the global economy recovers from the Covid-19 pandemic and business activity normalizes. The oil market remains in severe backwardation, with near-term future contracts trading substantially higher than the longer-dated ones (chart below). This reflects tight supply in the market as traders are paying an outsized premium for spot cargo. Compared to a month ago, the front end of the WTI futures curve has steepened substantially, suggesting that market conditions are getting tighter.

WTI Futures Curve – Today vs. 1 Month Ago

Crude Oil Prices Eyeing $100 Mark on Strong Demand, Geopolitical Tensions

Source: Bloomberg, DailyFX

On the supply side, the amount of increase in global output doesn’t seem to be sufficient to meet rising demand. OPEC+ committed to raise production by 400k bpd per month, but the oil cartel was unable to meet its output target. The International Energy Agency estimated that the gap between OPEC+ output and its target widened to 900k bpd in January, adding into supply constraints.

While oil prices have surpassed their pre-pandemic highs, OPEC+ production remains far below its pre-Covid levels (chart below). Against this backdrop, oil prices may be well-supported until OPEC+ starts to ramp up production substantially to ease supply constraints.

Total OPEC Production vs. WTI Crude Oil Prices

Crude Oil Prices Eyeing $100 Mark on Strong Demand, Geopolitical Tensions

Source: Bloomberg, DailyFX

CRUDE OIL TECHNICAL ANALYSIS

Technically, WTI is trending higher within a “Ascending Channel as highlighted on the chart below. The upper and lower bound of the channel may be viewed as immediate resistance and support levels respectively.

Prices are challenging an immediate resistance level of $94.60 – the 261.8% Fibonacci extension. Breaching this level will expose the psychological resistance level of $100.

The MACD indicator is trending higher above the neutral midpoint, suggesting that prices riding a strong uptrend but may be vulnerable to a technical pullback.

Crude Oil Prices Eyeing $100 Mark on Strong Demand, Geopolitical Tensions

Chart created withTradingView

--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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