OPEC+ to CUT production until March, WTI crude oil surges to 10-month high at $50
Matt Weller, CFA, CMT January 5, 2021 6:31 PM
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.
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.