Trading position (short-term; my opinion; levels for crude oil’s continuous futures contract): I’m revising the target and stop-loss as a consistent long rally seems unlikely at this point. Hold long positions with entry at $59-61 with $54.81 as a stop-loss and $65.50 as the initial price target.
Towards the end of last week, everyone interested in the crude oil market was waiting for the outcome from Thursday’s (Mar. 1) OPEC+ meeting. There were general expectations that the production cuts imposed by the cartel will continue resulting in a restricted supply in the market. In a move that surprised everyone, the final agreement of the meeting was to gradually lift production cuts in the coming months. For the next three months, production cuts will be reduced to approximately 75% of the current levels. I’m not going into specific current production numbers because in today’s market environment, it hardly matters as it is a demand driven market.
Indeed, demand will be king for the next few months. There is a sufficient supply in the market in the form of production capacity, inventories and storage. So, news impacting supply lines like the Suez Canal blockage will fail to move the market significantly because of two key reasons. The first reason is that future demand growth can be sluggish or even flat as the third wave of Covid-19 is hitting major consumption countries namely India, the U.S. and Europe. The surge in cases is further complicated by the emergence of multiple variants of the virus, leading to an imposition of lockdowns by authorities as they have no other choice. The second reason is that while there is still a production deficit compared to current consumption, the demand is being met from oil taken from inventories and storage which are at a much high level since last year.
The decision of OPEC+ to scale back on production cuts will bring an additional 2 mbpd into the markets. The market responded in a counter-intuitive manner by being bullish, which can be interpreted as an expectation of a consistent recovery of global demand. After one year, the pandemic still continues, however, everyone is learning to live with it. The OPEC+ decision can also signal that government policies worldwide may lean towards shutdowns only as a last resort.
The coming few weeks may be entirely determined by geopolitical factors and logistics risk. The Iran-China oil deal, China and India determined to seek cheaper oil sources, and the U.S. boosting oil production are a few of the factors which will determine a future course. The market is still undecided and hovering around $60, the U.S. dollar is slightly bearish and practically flat, as seen in the chart below, which means oil has further support at current levels.
I am still bullish for the short-term, however, a consistent rally seems unlikely. Profit booking at the $65-level can be looked at as the market is going back to volatility and flip-flopping behaviour.
To summarize, there are fewer signals in the market to move oil strongly in any direction currently, so expect stability for the next few days. Support at $60 levels continues and the future course will be determined by geopolitical factors at play involving the U.S., Saudi Arabia, Iran, China and India.
As always, we’ll keep you, our subscribers well informed.
Trading position (short-term; my opinion; levels for crude oil’s continuous futures contract): I’m revising the target and stop-loss as a consistent long rally seems unlikely at this point. Hold long positions with entry at $59-61 with $54.81 as a stop-loss and $65.50 as the initial price target.
Thank you.
Nishant Jain, MBA, CPSM
Oil Trading Strategist
