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Oil Extends Bullish Price Action as US Inventories Fall for Third Week

Oil Extends Bullish Price Action as US Inventories Fall for Third Week

David Song, Strategist

Oil Price Talking Points

The price of oil stages a three-day rally following a larger-than-expected decline in US inventories, and crude may stage a larger recovery over the remainder of the month as it reverses ahead of the May low ($61.56).


Oil Extends Bullish Price Action as US Inventories Fall for Third Week

The price of oil extends the recent series of higher highs and lows as US inventories contract for the third consecutive week, with stockpiles narrowing 2.979M in the week ending August 20 versus forecasts for a 2.683M decline.

Image of DailyFX economic calendar for US

Signs of stronger demand may keep the price of oil afloat as the Organization of Petroleum Exporting Countries (OPEC) remain reluctant to push production towards pre-pandemic levels, and it seems as though the group will stay on track to raise output by “0.4 mb/d on a monthly basis” even as the Biden Administration argues that “OPEC+ must do more to support the recovery.”

In turn, the decline from the July high ($76.98) may turn out to be a correction in the broader trend as OPEC’s most recent Monthly Oil Market Report (MOMR) reveals that “total world oil demand is projected to surpass the 100 mb/d threshold in 2H22 and reach 99.9 mb/d on average for the whole of 2022,” and data prints coming out of the US may continue to prop up the price of oil as weekly field production holds steady at 14,000K in the week ending August 20.

Image of EIA Weekly US Field Production of Crude Oil

A deeper look at the figures from the Energy Information show weekly US field production still below pre-pandemic levels after rising for two straight weeks, and current market conditions may fuel higher oil prices as signs of stronger demand are met with limited supply.

With that said, the price of oil may stage a larger recovery ahead of the next OPEC and non-OPEC Ministerial Meeting on September 1 amid the ongoing decline in US inventories, and crude may continue to retrace the decline the July high ($76.98) as it appears to have reversed course ahead of the May low ($61.56).

Oil Price Daily Chart

Image of Oil daily chart

Source: Trading View

  • Keep in mind, crude broke out of the range bound price action from the third quarter of 2020 as it developed an upward trend, with the price of oil taking out the 2019 high ($66.60) as both the 50-Day SMA ($70.72) and 200-Day SMA ($60.62) established a positive slope.
  • The broader outlook for crude remains constructive as the rally from earlier this year removed the threat of a double-top formation, but lack of momentum to test the 2018 high ($76.90) pushed crude below the 50-Day SMA ($70.72), with the Relative Strength Index (RSI) forming a downward trend after flashing a textbook sell signal in July.
  • Nevertheless, the decline from the July high ($76.98) may turn out to be a correction in the broader trend as the price of oil reveres ahead of the May low ($61.56), with the move back above the $65.40 (23.6% expansion) region bringing the Fibonacci overlap around $70.40 (38.2% expansion) to $71.50 (38.2% expansion) on the radar, which lines up with the 50-Day SMA ($70.72).
  • A break above the August high ($73.95) may generate another run at the $74.40 (50% expansion) region, with the next area of interest coming in around $76.90 (50% retracement), which largely lines up with the July high ($76.98).
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--- 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.