The price of oil has surged higher at the start of the new trading week. This has helped to lift energy stocks and also underpin commodity currencies such as the Canadian dollar. Brent oil has made a high so far on the day at $52.50, thus achieving its best level since April 28. WTI has nearly reached $49.50 per barrel. There seems to be a real commitment about reducing the glut from oil powerhouses that are Saudi Arabia and Russia – the latter being the largest oil producer in the world and the former being the largest exporter. Saudi and Russia have agreed to do “whatever it takes” to reduce global oil stockpiles to their five-year average levels. To do this, these oil giants have come up with a plan to extend the deal to limit OPEC and some non-OPEC member’s oil production for nine months, until the end of next year’s first quarter. The decision will be made on May 25. Given the backing of Russia, in my view an agreement will be made. The market clearly expects that, with oil prices making a sharp comeback. So, what might happen in the next 10 days or so is that oil prices may continue to drift generally higher, the dips may be bought and then a sharp reaction higher when the expected news comes out on 25th.
Indeed, the bullishness in price action has eroded many of the bearish factors that were in force until the start of last week. Brent, for example, was quick to reclaim the broken $49.70/90 support level as soon as speculation about an extension of the deal to the first quarter of 2018 started. It has since broken many resistance levels and today reclaimed the 200-day average. The broken resistance levels may turn into support going forward. But the pace of buying may slow down as price approaches nearer to the top of the recent range. But if the range high at $58.35 eventually breaks, then it is reasonable to expect a sharp extension to the upside, perhaps all the way to the 161.8% Fibonacci extension level at $65.55 given the relatively shallow pullback (near the 38.2% Fibonacci retracement against the 2016 low). In the short-term though, bullish traders will need to deal with upcoming resistance levels, starting at $52.70 then the bearish trend line around $55.00/55.50 area. The key short-term support level to watch is at $51.10, which roughly marks the point of origin of today’s breakout. Additional support comes in around the $49.70/$49.90 area – the short-term bias remains bullish until and unless price moves back below this range.