Crude oil technical analysis: Will the rally continue?
Supply constraints pushed US oil prices higher over the past month amid increased stock drawdown as the hurricane season halted production in the country.
The West Texas Intermediate (WTI) spot price jumped to 1.5-month highs on 15 September and reached an intra-day peak at $72.67 per barrel. Although prices have since edged lower, they remained around the $70 level, 8% higher than a month ago.
In the crude oil price analysis published on 17 September, Ole Hansen, the head of commodity strategy at Danish bank Saxo Markets, said: “Crude oil is headed for a fourth weekly gain, with the COVID-led August slump long forgotten, and with both crude oil and natural gas still dealing with the disruptive and price-supportive aftermath of Hurricane Ida.”
“Producers of both continue to struggle, reinstating production on platforms in the Gulf of Mexico with the IEA [International Energy Agency] in its latest monthly Oil Market Report, seeing a potential loss of more than 30 million barrels. With refineries also struggling to get back up and running, the result has been a sharp and price-supportive reduction in fuel stocks of gasoline and diesel.”
Tropical storm Nicholas made landfall in Texas on 14 September, further disrupting oil production in the Gulf Coast, which was mostly halted by the destructive forces of Hurricane Ida that hit the region at the end of August. Ida is the fifth-strongest hurricane to ever hit the US mainland.
The Gulf of Mexico (GoM is one the key production hubs for oil in the US and accounted for 15% of the country’s crude-oil production in 2020, according to the US Energy Information Administration (EIA).
On 16 September, the EIA said: “As a result of the hurricane, 96% of crude oil production and 94% of natural gas production in the US federally administered areas of the Gulf of Mexico (GOM) were shut in, according to estimates by the US Department of Interior’s Bureau of Safety and Environmental Enforcement. At least nine refineries shut down or reduced production.”
As a result, the EIA has revised its estimate for US crude oil production in the GoM in September to 1.2 million barrels per day (b/d), down by 0.5 million b/d from the previous estimate. The industry body expects crude-oil production to resume throughout September and output to return to the forecast levels in October.
The EIA warned, however, that the forecast could be highly uncertain as “repairs to any infrastructure required to resume refinery operations could potentially take longer”.
Following the production outage, there was an increased drawdown of US crude oil. The weekly US inventory fell to 4.17 million barrels, 14% below the stock level at the beginning of this year, EIA data on 15 September shows.
Crude oil price trend so far in 2021
According to the crude oil chart, prices have been rising since the beginning of this year as economic activities in some parts of the world rebound following COVID-related lockdown measures.
The compliance of the Organization of the Petroleum Exporting Countries (OPEC) members in restraining oil output since April this year has also boosted oil prices. WTI gained 57% in the first half of this year and Brent oil hit a high of $77.42 on 6 July when the OPEC meeting hit a deadlock.
The WTI spot price started the year at $48.42 per barrel, and the uptrend was temporarily halted in August as concerns on falling demand weighed on the market.
According to OPEC, in its September report:
“Crude oil futures prices on both sides of the Atlantic moved sharply lower during the first three weeks of August. They fell to their lowest levels since last May amid deteriorating market sentiment, as concerns about short-term oil demand outlooks in Asia, mixed economic data and the prospects of higher global oil supply triggered a sharp sell-off.”
WTI prices fell to $62.17 on 20 August, but rebounded as the hurricane season hit production in the US amid improving demand.
At the time of writing, on 20 September, the commodity traded at $70.17 per barrel.
For a comprehensive crude oil technical analysis, check out this video in which David Jones, Capital.com’s chief market strategist, recaps the market’s latest news and trends and highlights key levels to watch.
Will oil prices continue to rise?
Despite the temporary short-term disruption in the US, crude-oil market analysis by Saxo Markets indicated that price gains could be limited as production normalises and the pressure on supply tightness eased.
As Hansen from Saxo Markets noted:
“Concerns about Chinese demand, a continued recovery in US production and the prospect for more crude oil being released from strategic reserves in China, and the US may curb further short-term gains above the multi-year trendline going back to the 2008 record peak, currently just below $77.”
In response to soaring prices amid supply tightness, Reuters reported that China has auctioned its first strategic petroleum reserve (SPR) last week. The country maintains an emergency fuel store of oil, and China does not release data on the inventory volume.
According to state-owned oil and gas supplier CNPC, the completion of the third-phase oil-storage project in 2020 will increase the total capacity of China’s strategic oil reserve to 503 million barrels.
A stronger US dollar and higher rig counts in North America are also expected to weigh on prices. The US Dollar Index (DXY) strengthened to 93.39 on 20 September, up from 93.19 at the close on 17 September.
Investors are likely to exit their positions on oil to invest in the US dollar if the currency provides a higher return. As a result, a stronger US dollar tends to weigh on oil prices. The WTI spot fell as low as $70.17 per barrel at the time of writing on 20 September, down 2% from $71.72 on 17 September.
In addition, the rig count in North America has continued to rise over the year to 666 by the week ending 17 September, up by 20 from a week ago and more than double from the same time in 2020, data from oilfield service provider Baker Hughes showed.
Higher rig count is an indication of increased drilling activities and oil production level.
When considering analyst commentary and predictions, it’s important to keep in mind that they can get their estimates wrong. You should always do your own research to form a view of the outlook for an asset and the relevant market conditions.
OPEC raises crude-oil demand forecasts in 2021/2022
The Organization of the Petroleum Exporting Countries (OPEC) also revised upward its demand forecast this month, which boosted the overall market sentiment based on its crude oil outlook.
In its monthly oil market report published on 13 September, OPEC wrote:
“The underlying assumptions for world economic growth in 2021 and 2022 are largely unchanged. This includes, in particular, the assumption that COVID-19 will remain well-contained in advanced economies in the sense that it will not dampen the recovery beyond current levels and the pandemic will also not pose a large obstacle to major emerging economies.”
Demand forecast for OPEC crude in 2021 was revised up to 27.7 thousand barrels per day (mb/d), up by 0.3 barrels per day (b/d) from the previous projection in August, and around 4.9 mb/d, or 21.5% higher than in 2020.
Strong import data from China, the world largest crude-oil importer, also supports OPEC’s optimistic forecast.
OPEC explained:
“Preliminary data shows oil imports rising month-on-month in August to mark a 14-month high, while product exports declined over the same period to stand at a 12-month low, indicating strengthening domestic consumption and providing a supportive market signal going forward.”
The estimate for OPEC crude demand in 2022 was also lifted to 28.7 million b/d, up by 1.1 million b/d or 4% from the previous forecast. OPEC crude consumption is expected to be around 1.1 mb/d, or 4% higher than in 2021.
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