Introduction
OPEC has been bickering for months over what to do with their production limits as the pandemic slump in demand subsides. With canceled meetings and countries at loggerheads, there are signs that an agreement is being struck (or is at least close). The big bull run in the oil price is showing signs of faltering and a correction may be close.
- As the global demand for oil rebounds following the pandemic, OPEC+ continues to restrict supply.
- Sources suggest that a deal has been struck to increase production.
- Technical analysis of Brent Crude oil shows indicators suggesting a near to medium-term top is threatening.
OPEC production cuts have helped drive oil higher in 2021
The oil price has been on a huge bull run in 2021. The origins of the move date back to early November with Brent Crude under $40. Since then the price has soared higher by around 97%.
OPEC+ (the group of OPEC plus other major oil-producing nations such as Russia) cut production by -9.7m barrels of oil per day in 2020 (almost -10% of global supply) as demand slumped during the heights of the pandemic. However, oil demand is expected to recover by +6 million barrels this year. As of July, OPEC+ production cuts are still -5.8m barrels and that was even after increasing production by +2.1m barrels in April.
However, with Iran in talks over the removal of international sanctions concerning its nuclear program, Iranian oil production resuming could add 1.0 to 1.5m barrels.
This comes as OPEC+ are supposedly reaching (or close to reaching) agreement between Suadi and the UAE which would add a further +2m barrels per day of supply. A final decision and agreement within OPEC+ regarding supplies are yet to be reached.
Increasing output as markets price in demand increase
These fundamental shifts should begin to weigh on the price. Markets are already questioning the prospect of future economic growth (US longer-dated bond yields falling). Furthermore, the US EIA also suggested a decline in demand for gasoline and diesel in the past week.
With OPEC+ increasing supply this shifts expectations of the balance between demand and supply. The uncertainty of this alone could give an excuse to take profits after such a huge bull run.
Technicals show Brent Crude bull run is wavering
The technical analysis of Brent Crude oil (MT5 code: UKOUSD) shows that there are growing signs of nerves amongst the bulls. There have now been three “bearish engulfing candlesticks” (of bearish key one-day reversal bars) in the past three weeks.
This comes as the price has begun to develop a far more choppy phase within the uptrend channel. The Relative Strength Index momentum has tailed off back to 50 and a move under 50 would certainly begin to question bull control.
We also see with other indicators:
- for the MACD there is a near to medium term decline following a sell signal (or at least profit-taking signal) two weeks ago.,
- the Stochastics crossing back lower from around 50 is near to medium-term negative
- Bollinger Bands are narrowing and if this continues it would suggest a big move may be about to come. Given other technical signals, this big move is likely to be lower.
Support at $72.05/$72.60 is now key and a close below would complete a top pattern that would imply a correction towards c. $67.00. The next support under $72 comes in around the old $70 breakout.
Resistance is increasingly important at $77.10 now with the key high at $78.40.
Conclusion
The more supply that OPEC+ releases back into the market, the more the bulls will become wary of chasing oil higher. Technicals also suggest that there is an increasing caution entering the market which could give rise to a near to medium term correction.
