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Oil Talking Points

Crude pares the small pullback from earlier this week, with oil sitting near the monthly-high ($75.88), and recent price action keeps the near-term outlook tilted to the topside as the Relative Strength Index (RSI) sits in overbought territory for the first time since the start of the year.

Image of daily change for financial instruments

Oil Remain Overbought Despite Jump in U.S. Crude Inventories

Image of daily change for oil prices

Oil may continue to catch a bid over the near-term as the Organization of the Petroleum Exporting Countries (OPEC) and its allies show little to no interest in boosting production, and the ongoing alliance raises the risk for higher energy prices as Saudi Arabia Energy Minister Khalid Al-Falih argues that some would say that the market is ‘oversupplied.’

Image of DailyFX economic calendar

Moreover, the impending U.S. sanctions on Iran are likely keep oil prices afloat as the measures are slated to take effect from November 4, and the weakening outlook for supply may generate a further shift in market behavior even as updates from the Department of Energy (DoE) show U.S. crude inventories increasing a whopping 7975K in the week ending September 28.

With that said, developments surrounding OPEC and its allies may continue to influence the broader outlook for oil, and the current environment may fuel the recent advance in crude prices as there appears to be a material change in retail interest.

Image of IG client sentiment for oil

The IG Client Sentiment Report now shows37.4% of traders are net-long crude, with the ratio of traders short to long at 1.67 to 1. In fact, traders have remained net-short since September 21 when oil traded near $70 even though price has moved 7.0% higher since then. The number of traders net-long is 1.7% higher than yesterday and 16.7% lower from last week, while the number of traders net-short is 5.9% higher than yesterday and 15.6% higher from last week.

The jump in short interest provides a contrarian view to crowd sentiment as oil prices clear the July-high ($75.24), with recent price action raising the risk for fresh yearly highs in crude especially as the Relative Strength Index (RSI) suggests the bullish momentum is gathering pace, with the oscillator holding in overbought territory for the first time since January.Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

Oil Daily Chart

Image of oil daily chart
  • Still keeping a close eye on the RSI as it still holds above 70, with oil still at risk for fresh yearly highs if the oscillator pushes deeper into overbought territory;may see the former-resistance zone around $71.00 (50% expansion) to $72.70 (50% expansion) now offer support.
  • Still waiting for a close above the $75.20 (78.6% expansion) to $75.80 (100% expansion) region to open up the topside targets, with the next region of interest coming in around $78.30 (100% expansion) to $79.30 (38.2% retracement).

For more in-depth analysis, check out the Q4 Forecast for Oil

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.