WTI Coiling After OPEC+ Production Cut Agreement
Matt Weller, CFA, CMT April 13, 2020 1:59 PM
The latest developments in the oil market cannot be ignored...
Mirroring the likely path of a post-COVID-19 economic recovery, traders are gradually filtering back to their desks after a long holiday weekend. With volumes running far lower than usual and many major markets still closed, we’re cautious about reading too much into current prices, but the latest developments in the oil market cannot be ignored.
After a week-long marathon of negotiations, the world’s top oil producers agreed to a deal to cut global oil production by 9.7M bpd, about 10% of total output. The bulk of the promised cuts fittingly fall to Saudi Arabia and Russia, who kicked off the current oversupply issues by failing to reach an agreement back in early March.
When it comes to the oil market though, even these production cuts will not bring supply and demand into balance. The mass disruption from the COVID-19 outbreak has absolutely decimated demand (GasBuddy reported that demand for petrol has fallen by -55% from early February levels), and these cuts, especially relative to the inflation production figures over the last month, will not bring the market back into balance unless we see a dramatic “V-shaped” economic recovery in the coming weeks.
That said, the Saudi Oil Minister recently announced that the Kingdom is prepared to cut production further in June if necessary, so at least oil bulls can take solace in the fact that producers are taking the situation seriously. Even US President Trump hinted this morning that additional production cuts could be on the way.
Turning our attention to the hourly chart, prices for West Texas Intermediate crude oil, the American standard blend, are trading smack dab in the middle of the 4-week range between support at 20.00 and resistance up near 28.50:
Source: TradingView, GAIN Capital
As we go to press, WTI is forming a short-term symmetrical triangle pattern. For the uninitiated, or the uninitiated, this pattern is analogous to a person compressing a coiled spring: as the range continues to contract, energy builds up within the spring. When one of the pressure points is eventually removed, the spring will explode in that direction.
It’s notoriously difficult to predict the direction of the breakout in advance, so short-term traders may want to wait for the breakout and trade in the same direction once its confirmed. For example, a downside breakout could open the door for a drop toward range support in the 20.00-21.00 zone, whereas a bullish break could set the stage for a continuation toward the 27.00 area, where we’ve seen resistance form earlier this month.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.