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Crude Oil Rally Stretched, Risk of Possible Correction Ahead

Crude Oil Rally Stretched, Risk of Possible Correction Ahead

Justin McQueen, Strategist

OIL HIGHLIGHTS:

  • Crude Oil Prices Extend Rally as Tighter Supply Underpins
  • Oil Technical Levels to Watch

Crude Oil Prices Extend Rally as Tighter Supply Underpins

Oil prices have gone from strength to strength in recent months, as market participants look to a brighter 2021. That said, the acceleration in the move higher has stepped up with Brent crude futures breaking out since the move above $60, having last week recorded its 4th consecutive weekly gain. Among the primary reasons for this supercycle move higher across oil prices has been a reduction in oil supply, particularly from OPEC+. While record winter storms hitting Texas oil supplies the possibility of strikes in Norway, threatening the country’s oil production have added a fresh impetus this morning.

However, going forward, in light of the steep rise in oil prices, questions will remain as to when OPEC+ will begin to raise oil output, particularly Saudi Arabia, who last month agreed to cut oil production further, by an extra 1mbpd. Over the weekend, Russian Deputy PM Novak (Former Energy Minister) stated that oil prices could average $45-60/bbl, adding that the global oil market is now balanced. Alongside this, with US oil rigs coming back online, this signals that US oil production will be on the rise once again and thus, OPEC may have to mull raising oil production in order to maintain oil market share.

Oil Technical Levels to Watch

On the technical front, the RSI on the daily timeframe is at extremely overbought levels, which in turn, reduces the appeal of new longs in the asset and does instead increase the likelihood of a short-term correction in prices. On the topside, resistance resides at $66, which coincides with the 38.2% fib from the ATH to the 2020 low.

Brent Crude Oil Chart: Daily Time Frame

Crude Oil Rally Stretched, Risk of Possible Correction Ahead

Source: Refinitiv

Much like Brent crude, WTI is also nearing critical resistance, which could pose a short-term challenge to the current rally in the oil complex. Trendline resistance stemming from the all-time peak will be a key level to watch with the momentum in oil prices looking slightly frothy at current levels.

WTI Crude Oil Chart: Weekly Time Frame

Crude Oil Rally Stretched, Risk of Possible Correction Ahead

Source: Refinitiv

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