Technical Analysis: Oil Has Room To Run

U.S. West Texas Intermediate crude oil futures are trading higher on Friday as major producers agreed on a compromise to continue some cuts to production to cope with coronavirus-hit demand even though these fell short of expectations. The market surged early in the session but the rally ran out of steam following a test of a key technical level. The price action suggests that traders are reluctant to chase the market higher at current price levels.

Gains are likely being capped by mixed to bearish feelings over the OPEC+ compromise, but underpinned by the optimism surrounding the rollout of coronavirus vaccines and renewed hopes for a U.S. stimulus deal.

OPEC+ Announces a Compromise Deal

On Thursday, OPEC and its allies, including Russia, agreed to increase output by a modest 500,000 barrels per day (bpd) from January.

The increase means OPEC+ would move to cutting production by 7.2 million bpd, or 7% of global demand from January, compared with current cuts of 7.7 million bpd.

OPEC+ had been expected to extend existing cuts until at least March, after backing down from earlier plans to boost output by 2 million bpd.

Russian Deputy Prime Minister Alexander Novak said the group would now gather every month to decide on output policies beyond January with monthly increases not exceeding 500,000 bpd.

Monthly meetings by OPEC+ will make price moves more volatile and complicate hedging by U.S. oil producers.

Vaccines May Have Influenced OPEC+'s Decision

Hopes for a speedy approval of COVID-19 vaccines have been spurring the rally in crude oil for weeks. This news helped dampen the extremely bearish outlook for demand at the end of October. In reaction to this news, several OPEC+ producers started questioning the need to keep such a tight rein on oil policy, as advocated by OPEC leader Saudi Arabia. This news may have encouraged some OPEC+ members to push for a smaller reduction in production cuts.

Stimulus Hopes Rising

Republicans in the U.S. Congress struck a more upbeat tone on Thursday during coronavirus aid talks as they pushed for a slim $500 billion measure that previously was rejected by Democrats who say more money is needed to address the raging pandemic.

US Energy Information Administration Weekly Inventories Report

In the United States, crude stockpiles fell last week, while gasoline and distillate inventories rose sharply as refiners slowed production amid weakening demand, the Energy Information Administration (EIA) said on Wednesday.

Crude oil stocks fell by 679,000 barrels in the week to November 27, less than the 2.4 million-barrel decline forecast in a Reuters poll of analysts.

Gasoline stocks increased by 3.5 million barrels, while distillate inventories were up by 3.2 million barrels.

Weekly Technical Analysis

Weekly January WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. The uptrend was reaffirmed when buyers took out last week's high. A trade through $34.04 will change the main trend to down.

The main range is $58.92 to $26.22. Its retracement zone at $42.57 to $46.43 is currently being tested. This zone remains potential resistance.

Weekly Technical Forecast

Based on this week's price action, the direction of the December WTI crude oil market the week-ending December 11 should be determined by trader reaction to the 61.8% level at $46.43.

Bullish Scenario

A sustained move over $46.43 will indicate the presence of buyers. If this move creates enough momentum then look for an acceleration to the upside since the nearest resistance is $53.59.

Bearish Scenario

A sustained move under $46.43 will signal the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly extend into the 50% level at $42.57. This is a potential trigger point for an acceleration to the downside. However, with the main trend up, buyers are likely to come in on a test of this level.

Short-Term Outlook

Prices should remain firm over the near-term as long as the market can hold above $42.57. The trigger point for an acceleration to the upside is $46.43. The weekly chart shows that there is plenty of room to the upside over this level with $53.59 the next likely target.

In order to generate the momentum needed to trigger the breakout to the upside, traders are going to have to continue to remain optimistic that vaccines and stimulus will increase demand expectations.

However, there is still a risk that the increased demand will get pushed further and further into 2021 as experts predict a massive surge in COVID-19 cases after the Christmas and New Year's holidays. Furthermore, there is always the possibility the U.S. will call for greater restrictions and lockdowns if the pandemic continues to worsen.