For most of 2018, oil prices have churned higher.
Granted, prices took a short breather in early May through June 2018, but that proved to be short-lived on fears that supply won’t be able to offset issues.
In fact, since the middle of June 2018, oil ran from a los of $63.50 to $74 a barrel – its highest point in about four years thanks to OPEC’s underwhelming news of a smaller than expected increase in oil production.
While OPEC did approve of a one million barrel boost to daily output, several cartel members said the actual increase would only reach 700,000.
“They came up short relative to market expectations,” said John Kilduff, a partner at New York-based hedge fund Again Capital LLC, as quoted by Bloomberg. OPEC and its partners are exhibiting a “lack of being aggressive about wanting to get oil prices down.”
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Even the Saudis promise to boost production on President Trump’s request wasn’t likely to stem the oil price rallies. That’s because supply disruptions from produces like Canada and Venezuela, coupled with stronger global demand have significantly tightened the oil market in recent weeks.
Even Libya’s state-run oil company said it wouldn’t be able to honor contracts to deliver oil, widening outages there, too. Production in Venezuela was even still plummeting because of the country's increasing economic instability.
After producing 2.3 million bpd in early 2016, Venezuelan output was only 1.6 million BPD in early 2018 and was feared to fall by another half-million. At the time, we also had to consider there may not be enough spare capacity to make up for such supply disruptions, especially once U.S. sanctions reduce Iranian production.
With the combination of supply disruptions and high demand, “we are getting a preview of how the oil market will react when Iranian oil comes off the market,” said Ellen Wald, oil-market analyst and president of Transversal Consulting, as quoted by The Wall Street Journal.
Some analysts believe oil could run to $77 a barrel, note analysts at RBC Capital. “If we break above that,” they say. “Then there’s considerable room to run.”
The new worries could send oil prices to $90 by the end of 2018, notes Bank of America Merrill Lynch, which would be very bullish for related oil stocks. We have to consider that many oil companies will gladly cash in on the windfall when $90 oil materializes.
The Technical View
While supply issues grow worse, we have to consider that oil is also overdue for a near-term correction off the highs.
If we look at the price of oil over the last year, we can clearly see that nearly 80% of the time when oil hits or penetrates its upper Bollinger Band (2,20), coupled with over-extensions on RSI, MACD and Williams’ %R, crude has a historic tendency to revert to mean. That’s just something to keep in mind if you’re looking to trade the rally now.
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