Crude oil drifts lower

Crude oil prices have eased back at the start of this week, with a barrel of Brent costing $62.25 and WTI $57.25. From their post-OPEC highs, Brent was $1.90 lower and WTI was $1.60 worse off at the time of this writing. Still, oil prices remain very close to their 2017 highs they had reached in November. In other words, the OPEC’s meeting last week has had very little immediate impact on oil prices. In part, this is because of their improving communication strategy. Almost everyone had expected the oil cartel to extend their production agreement with the selected non-OPEC members to the end of 2018. The lack of a surprise or shock meant oil traders had little reason to sharply expand or reduce their positions.

But their agreement to review the duration of oil output cuts based on fundamentals at the OPEC’s next meeting in June means there is a possibility they could end the arrangement sooner than expected, which is somewhat bearish, I think. With oil prices being already significantly higher compared to their 2016 lows, there will be less incentive for the OPEC and Russia to maintain their oil supply collusion, especially as US shale producers continue to win market share. Thus there is a risk that the agreement could end prematurely, resulting in another supply war. Indeed, it will be rather easy for US shale producers to ramp up oil output when prices rise above their production costs. I think oil prices will struggle to go north of $65-$70 per barrel for this reason. However, I don’t anticipate to see low $40s, let alone $30s, again as the fundamental picture is a lot healthier compared to a few years ago.

Meanwhile from a technical stand point, both oil contracts have reached and are respecting key resistance levels after the recent rally. The small pullback we have seen so far wouldn’t worry the long-term bulls unless its leads to a break in market structure of higher highs and higher lows. The last swing low on WTI was at just below $55. Thus, only a clean break below this level would be bearish as it will create a lower low. Unless that happens, we would remain technically bullish medium-term. In the short-term, there is scope for a deeper pullback as prices continue to unwind from overbought levels.

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