Bull Run Continues As Traders See Tight Supply In 2022

U.S. West Texas Intermediate crude oil futures are edging higher early Friday, picking up where they left off the previous session. On Thursday, oil prices rose 1% after top oil producer Saudi Arabia rejected calls for additional OPEC+ supply and the International Energy Agency said surging natural gas prices could boost demand for oil among power generators. A government report predicting a slide in U.S. output is also helping to underpin prices.

The price action suggests traders are downplaying an unexpectedly large increase in U.S. crude inventories as refiners cut production in a generally slower period for those facilities, according to a weekly government inventories report.

US 2021 Crude Output Seen Falling More than Previously Forecast - EIA

U.S. crude oil output is going to fall more than expected previously in 2021 and bounce back in 2022, according to a monthly government report released on Wednesday.

Crude output will drop 260,000 barrels per day to 11.02 million bpd this year, and then rebound to 11.73 million bpd in 2022, the U.S. Energy Information Administration said. In its previous forecast, the statistical arm of the Department of Energy had forecast a 200,000 bpd drop in 2021.

The agency cut its output forecast for the third and fourth quarters of 2021 to arrive at the lower number for the year.

Saudi Energy Minister Dismisses Calls for Extra OPEC+ Barrels

OPEC leader Saudi Arabia dismissed calls for speedier oil output increases on Thursday, saying its efforts with allies were enough and protecting the oil market from the wild price swings seen in natural gas and coal markets, Reuters reported.

"What we see in the oil market today is an incremental (price) increase of 29%, vis-à-vis 500% increases in (natural) gas prices, 300% increases in coal prices, 200% increases in NGLs (natural gas liquids) …," Saudi energy minister Prince Abdulaziz bin Salman told a forum in Moscow on Thursday.

Asked about calls by major consumers like the United States for OPEC+ to increase production further to cool off rising oil prices, Prince Abdulaziz said:  "I keep telling people we are increasing production."

He said OPEC+ would be adding 400,000 barrels per day (bpd) in November, and then again in the following months.

"We want to make sure that we reduce those excess capacities that we have developed as a result of COVID," he said, adding that OPEC+ wanted to do it "in a gradual, phased-in approach.

IEA Says Energy Crisis Could Threaten Global Economic Recovery

A global energy crunch is expected to boost oil demand by 500,000 barrels per day (bpd) and could stoke inflation and slow the world's recovery from the COVID-19 pandemic, the International Energy Agency (IEA) said on Thursday.

"Record coal and gas prices as well as rolling blackouts are prompting the power sector and energy-intensive industries to turn to oil to keep the lights on and operations humming," the IEA said in its monthly oil report.

"Higher energy prices are also adding to inflationary pressures that, along with power outages, could lead to lower industrial activity and a slowdown in the economic recovery."

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. The uptrend was reaffirmed this week when buyers took out the previous high at $79.62. A trade through $61.11 will change the main trend to down.

Retracement Level Analysis

The minor range is $61.11 to $81.44. The market is currently trading on the strong side of its retracement zone at $71.28.

The short-term range is $55.54 to $81.44. Its retracement zone at $68.49 to $65.43 is the best support area. This zone is controlling the near-term direction of the market.  

The main range is $37.70 to $81.44. If the main trend changes to down then its retracement zone at $59.57 to $54.41 will become the primary downside target and value area.

The retracement zone targets will move up as the market moves higher.

Weekly Technical Forecast

The direction of the December WTI crude oil market the week-ending October 22 will be determined by trader reaction to $78.76.

Bullish Scenario

A sustained move over $78.76 will indicate the presence of buyers. The market is currently trading on the bullish side of the psychological support at $80.00. Crude oil is also trading inside a pair of seven-year highs at $81.37 and $81.71.

The high at $81.71 is a potential trigger point for an acceleration to the upside with $85.25 the next major upside target.

Bearish Scenario

A sustained move under $78.76 will signal the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly extend into the nearest support at $71.28, followed by a support zone at $68.49 to $65.43. This is a value area so look for buyers on a test of this zone.

Short-Term Outlook

The fundamentals are bullish. This is encouraging investors to add to their already established long positions by buying both dips and strength.

As the market moves higher, volatility should increase. Our work suggests there is no true resistance over $81.71, which will make $85.25 the next likely target.

But it doesn't stop there. The key to perhaps triple-digit prices in late 2021 or early 2022 is the unexpected increase in demand from the switching of natural gas to crude oil by power generators.

If winter comes early in Europe and the power generators increase demand for crude then prices could spike to the upside.

The biggest worry for some economists is the possibility that a spike in crude oil stops the global recovery. This could cause demand destruction, which could crush prices.

The point is, it won't be a free ride to $100 crude. There will be risks.