Brent oil has hit a new year-to-date high, tantalizingly close to the psychologically-important $80 mark and trading around levels not seen since 2018.
From a technical perspective however, Brent appears set for an immediate pullback, considering that prices have breached the upper Bollinger band while the 14-day relative strength index is flirting with the 70 mark; both of these technical indicators signal overbought conditions.
Why are oil prices so high?
Using simple economics, prices rise when demand is higher than supply, all else equal.
Oil prices have surged on the back of a global energy crunch, as major economies rush to stock up supplies ahead of winter (think of the amounts of fuel needed to keep your home warm during those cold months). This surge in demand is evident in the notable drawdowns in global stockpiles, with US inventories hitting their lowest levels since 2018. It is worth keeping in mind that oil bulls have also been supported by the disruptions to US crude production from Hurricane Ida last month.
Natural gas tends to be favoured as a heating fuel, but its prices too have skyrocketed! Natural gas futures in the UK have soared by over 230% so far this year.
As gas becomes more expensive, markets are then turning their attentions to oil-products as an relatively cheaper heating source.
That shift in demand in turn has added to the upward pressure for oil prices.
But wait … isn’t OPEC+ pumping out more oil?
Yes, but it’s not enough for markets at present.
Even though OPEC+ has stuck to its plans for gradually raising output levels by 400k bpd each month, the global demand recovery is still able to absorb those incoming barrels. Earlier this month, OPEC+ released its own projections that global inventories would drop at a rate of 825k barrels a day through end-2021.
So do the math. The incoming OPEC+ supplies is only about half the projected pace of the drawdown in global inventories.
When this alliance of 23 major oil producers holds its next meeting a week from today, on October 4, markets will be closely monitoring to see if they decide to ramp up output by higher-than-expected levels. After all, US President Joe Biden has already urged them to do so, in the name of protecting US households whose wallets have been hurt by rising prices at the pump.
Where to next for oil prices?
Overall, as long as global market conditions continue tightening through year-end as expected, this creates a supportive environment for oil bulls, creating a sturdier floor below oil benchmarks.
For this week, markets will be closely watching the weekly US inventories data on Wednesday, already with whispers of another drawdown exceeding 3 million barrels.
Should such forecasts prove true, then Brent oil looks set for a date with $80/bbl.
Then there’s next week’s key decision by OPEC+ that’s set to have a major say on how oil prices fare in the aftermath.
However, if Delta-related concerns take an unexpected climb and dominate market sentiment, coupled with a surprise build in US inventories, that could prompt oil prices to unwind more of its recent gains beyond any technical pullback over the immediate term.
Still, support for Brent oil should arrive at the recent cycle high around $75/bbl, with stronger support expected to follow around the $73/bbl region, which are also where key Fibonacci lines can be drawn in any near-term retracement from current levels.
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