OPEC+ to CUT production until March, WTI crude oil surges to 10-month high at $50
Matt Weller, CFA, CMT January 6, 2021 2:31 AM
The breakthrough in relations between Russia and Saudi Arabia removes some of the downside risk to oil prices and could lead to continued strength as the global economy recovers later this year
After failing to reach a deal yesterday, oil producing countries led by Saudi Arabia and Russia reached an agreement to cut production until at least March, sending West Texas Intermediate (WTI) crude prices soaring in midday US trade.
In terms of details, Russia and Kazakhstan will increase production by a total of 75K barrels per day, but Saudi Arabia is voluntarily cutting its production by a full 1M bpd through February and March, leading to a net production cut of over 900k bpd. The so-called “OPEC+” group reached the decision amidst the slow rollout of the COVID-19 vaccine globally and the potential for additional short-term lockdowns as a more virulent strain of the virus proliferates. In the words of Saudi energy minister Prince Abdulaziz bin Salman, “As we see light at the end of the tunnel, we must -- at all costs -- avoid the temptation to slacken off our resolve. Do not put at risk all that we have achieved for the sake of an instant but illusory benefit.”
While the decision to delay planned output increases is bullish for oil prices on its own, the fact that the diverse group of oil-producing countries were able to work through previously-strained relations to coordinate production is perhaps the bigger takeaway; many traders will recall that just last year, a standoff between Russia and Saudi Arabia over production contributed to oil prices briefly crashing into negative territory.
The breakthrough in relations between Russia and Saudi Arabia removes some of the downside risk to oil prices and could lead to continued strength as the global economy recovers later this year. It’s worth noting that the group is still producing over 7M bpd less than it was before the start of the pandemic, so we remain far from a “return to normal” in terms of global oil consumption.
For the first time since February, WTI crude oil touched $50.00/barrel, though prices are consolidating just below that key psychological level as we go to press. Turning our attention to the chart, WTI is trading solidly above its 21-, 50-, and 100-day EMAs, signaling an established bullish trend. Meanwhile, the price consolidation around $48.00 at the end of last year has alleviated the overbought condition in the RSI indicator, potentially paving the way for additional gains in the future:
Source: TradingView, GAIN Capital
To the topside, bulls will look to the 78.6% Fibonacci retracement of the pandemic swoon in the mid-51.00s as a logical target area. On the other hand, a break below the 21-day EMA at 47.20 could open the door for a deeper retracement, but buyers may nonetheless step in around the 50-day EMA near $45.00 given the bullish fundamental and technical backdrop.
Learn more about oil trading opportunities.
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
GAIN Capital Singapore Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the GAIN Capital group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), GAIN Capital Singapore Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact GAIN Capital Singapore Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither GAIN Capital Singapore Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
GAIN Capital Singapore Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.