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Oil Price Eyes Channel Resistance as Inventories Fall for Third Week

Oil Price Eyes Channel Resistance as Inventories Fall for Third Week

David Song, Strategist

Oil Price Talking Points

The price of oil climbs to a fresh monthly high ($58.91) as US crude inventories contract for the third consecutive week, and the overbought reading in the Relative Strength Index (RSI) may continue to coincide with higher oil prices like the behavior seen earlier this year.

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Oil Price Eyes Channel Resistance as Inventories Fall for Third Week

The price of oil approaches the upper bound of the ascending channel established in November as it rallies for eight consecutive days, and crude prices may continue to retrace the decline 2020 high ($65.65) amid signs of stronger consumption.

Image of DailyFX economic calendar for US

Fresh figures from the Energy Information Administration (EIA) showed US crude inventories falling 6.644M in the week ending February 5 versus forecasts for a 0.985M rise, and narrowing stockpiles may keep oil prices afloat as Saudi Arabia remains on track to reduce supply by 1 million b/d until April.

Image of EIA Weekly US Field Production of Crude Oil

However, the update also showed crude output increasing for the first time since November, with US production climbing to 11,000K from 10,900K in the week ending January 29. It remains to be seen if US output will recover from the COVID-19 pandemic as production still sits around its lowest level since 2018, but it seems as though the Organization of the Petroleum Exporting Countries (OPEC)will continue to regulate the energy market in 2021 as the group pledges to be “vigilant and flexible given the uncertain market conditions.

In turn, the price of oil may continue to trade above pre-pandemic levels ahead of the next Joint Ministerial Monitoring Committee (JMMC) meeting on March 3, and technical outlook remains constructive as the price of oil continues to track the upward trending channel carried over from November.

With that said, the price of oil may test the upper bound of the ascending channel as it extends the series of higher highs and lows from the start of the month, while the overbought reading in the Relative Strength Index (RSI) may continue to coincide with higher oil prices like the behavior seen earlier this year.

Oil Price Daily Chart

Image of Oil price daily chart

Source: Trading View

  • Keep in mind, crude broke out of the range bound price action from the third quarter of 2020 following the failed attempt to close below the Fibonacci overlap around $34.80 (61.8% expansion) to $35.90 (50% retracement), and the price of oil may continue to retrace the decline from the 2020 high ($65.65) as both the 50-Day SMA ($50.61) and 200-Day SMA( $41.49) track a positive slope.
  • More recently, crude has broken out of the range bound price action carried over from the end of January to extend the upward trend established in November, but the Relative Strength Index (RSI) has failed to keep up as a break of trendline support emerged ahead of February.
  • Nevertheless, recent developments in the RSI still offer a constructive outlook as the oscillator continues to hold above 70, with the extreme reading likely to be accompanied by higher oil prices like the behavior seen earlier this year.
  • Need a close above the $58.00 (50% expansion) to $58.40 (23.6% expansion) zone to keep the $59.40 (38.2% expansion) region on the radar, with the next area of interest coming in around $61.80 (50% expansion) followed by the Fibonacci overlap around $62.70 (61.8% retracement) to $62.90 (78.6% expansion).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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

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