U.S. West Texas Intermediate (WTI) Crude Oil recently hit a 28-month high almost breaking $59 before settling back around $57 a barrel today. Amidst potential disruption in Nigeria from strike action and growing political tensions in the Middle East, are we on the verge of reaching the ‘holy grail’ of $60 oil?
All in the balance
The oil market has continued to find its balance this year. Agreed production cuts and increased political unrest, not to mention the occasional hurricane, have all chipped away at the glut. Estimates from the International Energy Agency (EIA) show the excess in October 2017 had dropped to 140 million barrels above the five-year average, compared with 278 million in January 2017 (*Source Bloomberg Gadfly).
Spear-heading the drive for balance, OPEC has just agreed to an extended to the period of its supply cuts by up to a further 12 months. There are growing concerns that increasing U.S. production may offset part of the OPEC reduction, however, demand from China continues to grow and this was reflected in last Friday’s strong increase in WTI, a rise of almost 2%.
The price action of the past 9-months has been within a well-defined upward channel and this month saw WTI tapping the roof once more. From a charting point of view, what is significant is its back test of a clear trend line (shown in purple below) a couple of times implying the price is now keen to stay above the line. Additionally, another bull flag has formed and is on the cusp of being broken out. The Relative Strength Index (RSI) has reduced significantly indicating consolidation and allowing plenty of headroom for a further push north.
Usually with such a set-up, a trader will look to enter a trade as the price breaks out above the flag pattern with a target of similar height to that of the flag top to the recent low. Any such breakout has the potential distance to take on $60, with the pattern suggesting a top of around $61.30.
Commitment of Traders
Will a move to $60 be sustainable or is it more likely we will see a spike?
A very useful indicator of speculator sentiment is the commitment of traders; the comparison of long vs short positions. When divergence becomes extreme, market forces often dictate a reversal is on the cards. Taking a look at current positions above reveals divergence has reached extreme levels, with an exceptionally bullish stance for oil. Is it inevitable profit will be taken?
The author of this piece does not have a position in the financial instrument written about above.