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Brent Crude Oil Jumps Again As Lower-For-Longer View Is Dying

Brent Crude Oil Jumps Again As Lower-For-Longer View Is Dying

2018-05-22 15:00:00
Tyler Yell, CMT, Currency Strategist
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Brent Crude Oil Price Forecast Talking Points:

  • The ONE Thing: Brent maintains strong factors support a bullish trend with favorable momentum being maintained. Brent recently surpassed the price level of November 2014 when OPEC said production curbs were not necessary. Now, the production is low as planned but dropped more than expected due to high compliance of production curbs alongside a drastic production drop from petrostates like Venezuela. Trump’s abandonment of the JCPOA also is reducing market supply.
  • The back end of the forward's curve, bets on price at different time points, continues to rise showing that the lower-for-longer view is dying out.
  • Brent Crude Oil Technical Analysis Strategy: Uptrends are naturally overbought, and momentum remains bullish.An inability to close below the 26-day midpoint shows the trend remains in force as prices just broke above a key level on the long-term chart.
  • Access our recent Crude Oil Fundamental Forecast here

Crude has multiple strong factors lifting prices higher with options actions showing bets for extreme appreciation like $135-$200/bbl. While demand has been consistently higher, the main focus has been on the sharp drop in OPEC output alongside the view that oil may be moving into a new bullish cycle that eliminates the lower-for-longer view that was held for much of 2015-2016.

Bullish Momentum Aided By Dwindling Venezuelan Production

Most of the OPEC output drop has been planned thanks to OPEC+ production cuts. However, the shock value that has added a demand premium as expected supply is vanishing comes from the recent sanctions on Iran and Venezuela. The Venezuelan sanctions were recently applied by US President Trump who ordered sanctions on debt owed to Venezuela’s government after the weekend’s election drew ire from the international community.

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Data source: OPEC, Bloomberg

Unlock our Q2 18 forecast to learn what will drive trends for Crude Oil in a volatile Q2

The drop in Venezuelan supply is easily visible as supporting the move higher in Brent. However, the excess capacity that OPEC has to put a ceiling on prices should they remove the curves early is a constant concern for many bulls.

A quick history lesson will show you that OPEC’s track record is less than perfect of being willing to cap rising prices as the revenue gaps are filled much quicker despite pain felt elsewhere. If something were to pull OPEC out of the production curbs earlier than expected to put a ceiling on prices, it would likely be lost market share to the North American producers. Most notably, the recent headline about the ‘cease-fire’ in the trade war was aligned with China’s commitment to buy more energy from the US.

Bye-Bye, Lower-For-Longer

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Data source: Bloomberg

The futures curve is a tool that speculators and hedgers or corporates alike look to as the perceived fair value of an asset at different points in time due to the available information. The back of the curve is often a helpful source of information about sentiment and perceived effects of current policies.

The back of the curve lately is rising, and that likely is making OPEC+ feel very good about their recent success despite the drop in production from Venezuela and Angola and the sanctions on Iran and Venezuela.

In addition to soaring prices, scarcity in the market has seen the long-dated oil prices jump toward $70. While the back-end of a futures curve is volatile, it’s a good way to see that fears of ‘lower-for-longer’ or dying.

Technical View: Weekly Charts Shows Bullish Momentum, $90/bbl Target

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Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

TECHNICALLY SPEAKING:

Resistance:$83.02 / $90 (61.8% Extension From 2017 Rally, 61.8% Retracement of 2012/16 Range)

Spot: $80.32

Support:$79.61/ $76.39 (Weekly low, 26-day midpoint)

The only complaint bulls likely have about Brent is that the trend has been too strong to help identify re-entry points. Monday’s price action saw the pair briefly drop before rising again and is currently set to close at the highest level in three years.

The focal point of support comes from the weekly low at $79.61 and the 26-period midpoint at $76.36. The 26-day midpoint is a crucial component of the Ichimoku Cloud indicator that you see on the chart above. A hold above these levels on a closing basis shows us that falling production will continue to lift crude.

Not familiar with Ichimoku? You’re not alone, and you’re in luck. I created a free guide for you here

New to FX trading? No worries, we created this guide just for you.

MORE FOR YOUR TRADING:

Are you looking for longer-term analysis on Crude Oil and other popular markets? Our DailyFX Forecasts for Q2 have a section for each primary currency, and we also offer an excess of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our popular and free IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a surplus of helpful trading tools, indicators, and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions.

Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities, and our real-time news feedhas intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

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