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Crude Oil Prices Aiming Higher on OPEC Surprise, Inflation Expectations

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Crude Oil Fundamental Forecast: Bullish

  • Supply constraints, rebounding global demand and rising inflation expectations may drive crude oil prices higher in the near term.
  • Break above 2008 uptrend hints at further gains for oil prices.

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Supply constraints have sent crude oil prices storming higher in recent days, as OPEC+ shocked market participants by opting to keep its current output settings steady, despite previously contemplating introducing an additional 1.5 million barrels a day of output next month. Even more surprising was the announcement from Saudi Arabia that it would make the 1 million barrel-per-day voluntary production cut it introduced in February open ended.

This amounts to the cartel withholding 7 million barrels-per-day from the market, and may open the door for crude oil prices to continue gaining ground in the near term. Maintenance works at three of Western Canada’s major oil sands producers will also tighten global supplies further, with a reduction of 500,000 bpd expected next month.

OPEC Crude Oil Production Output

OPEC Oil Output

Data Source – Bloomberg

Rising inflation expectations may also serve as a tailwind for crude oil prices, as the rapid rollout of coronavirus vaccines, falling infection rates, and extensive fiscal support fuels speculation that an acceleration in consumer price growth is on the horizon.

Indeed, 5-year breakeven inflation rates have surged to the highest levels in over a decade, and appear to have dragged oil prices along for the ride.

Therefore, rising inflation expectations, supply constraints, and rebounding demand may pave the way for crude oil to extend its recent surge higher in the coming months.

5Y Breakeven vs. Oil Price

Data Source – Bloomberg

Crude Oil Weekly Chart – Break of 2008 Downtrend Hints at Extended Gains

From a technical perspective, the outlook for crude seems skewed to the upside as price surges above psychological resistance at 60.00 and pierces through the downtrend extending from the 2008 high.

With the RSI storming into overbought territory, and the MACD climbing to its highest levels since 2011, the path of least resistance seems higher.

A weekly close above the 2019 high (66.58) would probably intensify buying pressure and carve a path for price to challenge the 2018 high (76.88).

However, if 66.50 holds firm prices may enter a period of consolidation above the psychologically imposing 60.00 mark, before resuming the primary uptrend extending from the March 2020 nadir.

Crude Oil Chart

Crude oil weekly chart created using Tradingview

Crude Oil Daily Chart – Ascending Channel Guiding Price Higher

Zooming into the daily chart bolsters the bullish outlook depicted on the weekly timeframe, as crude oil continues to track constructively within the confines of an Ascending Channel.

With prices hovering above all six moving averages, and the RSI eyeing a push into overbought territory, further gains appear in the offing.

A daily close above psychological resistance at 65.00 would probably coincide with the RSI jumping above 70, and likely result in prices climbing to challenge key resistance at the 2019 high (66.58).

Alternatively, if 65.00 successfully neutralizes near-term selling pressure, a counter-trend pullback to confluent support at the 8-EMA and February 18 high (62.25) could be on the cards.

Crude Oil Chart

Crude oil daily chart created using Tradingview

IG Client Sentiment Report

The IG Client Sentiment Report shows 35.86% of traders are net-long with the ratio of traders short to long at 1.79 to 1. The number of traders net-long is 25.61% lower than yesterday and 11.74% lower from last week, while the number of traders net-short is 25.30% higher than yesterday and 3.31% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil – US Crude prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Oil – US Crude-bullish contrarian trading bias.

Crude Oil Prices Aiming Higher on OPEC Surprise, Inflation Expectations

— Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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