Oil Sells Off on OPEC+ Impasse But Bull Run May Not Be Over

By: Kim Chua, PrimeXBT Market Analyst Oil prices tumbled in a volatile week after OPEC+ producers cancelled the much-anticipated meeting where major players were unable to come to an agreement about the next supply increase schedule and its production limitations on nations.

On Monday, ministers from OPEC+, where OPEC, Russia and other producers, abandoned talks yet again after negotiations failed to close divisions between Saudi Arabia, the largest OPEC producer, and United Arab Emirates (UAE).

Initially, oil rallied on news of the breakdown in talks, but prices crashed as traders focused on the possibility that the strife will cause some national producers to open the taps and start exporting more barrels unilaterally, creating an oversupply. 

Traders’ fears were further ignited after Iraqi Oil Minister Ihsan Abdul Jabbar comment that his country did not want to see oil prices soaring above current levels and that he hoped that within 10 days a date would be set for a new OPEC+ meeting. This further gave traders reason to speculate that different nations will start increasing output on their own without limitation to take advantage of the current high oil price. 

Are traders’ fear over-blown? Traders do have reason to fear since this impasse is coming on the back of a rising number of COVID-19 cases yet again in many countries. Should countries again need to resume lockdowns, the nightmare scenario of last year when oil dropped below 0 could materialise again if nations start pouring new supply into the market. The chance of this happening is high as many nations will want to take advantage of the current 3-year high in oil price to sell as much as they can before COVID-19 lockdowns again send the price of oil crashing due to a reduction in demand. 

However, I personally think that the huge drop in oil price is more likely attributed to leverage long positions that got liquidated as the long oil trade got over-extended and overcrowded. Oil has been rising since mid-May after a consolidation from end-March where it fell 10% in a week. It looks set to be back at consolidation while waiting for the situation at OPEC+ to play out in the near term. I expect oil to hover around $70-$75 as market awaits fresh news out of OPEC+ since the Iraqi Minister had mentioned that he hoped another meeting would be arranged within 10-days. Some OPEC+ sources also said they still believed the group would resume discussions this month and come to an agreement on August’s output.

The price action has gotten interesting for oil. Previously, the market thought of a deal to be negative for the price of oil, while a failure to come to an agreement could send prices higher. However, the opposite happened and nervous traders sold off based on paranoia. The upcoming meeting, if any, will thus be interesting since a deal concluded may actually send the price of oil higher instead of lower since traders will no longer have to worry about individual nations over supplying. The sudden change in narrative suggests to me that it is actually technical works at play that has caused the price of oil to react this way. 

For the charting standpoint, the area around $76 is a major resistance that is not easily broken since oil has not visited this area since Oct 2018 before there was COVID-19. In other words, with COVID-19 still lurking, oil has climbed to a 3-year high. Hence, it would only make sense for traders who longed oil to take profit here, and for traders to open short positions here, waiting to buy back at lower levels. 

To determine if oil will continue with its uptrend or sink back lower depends on what happens at around the area between $66 and $68, which was the resistance turned support of the ascending triangle breakout that happened in May and took prices above $70. This is an important area of support if oil is to continue its upward movement, and should this level break, the next important support is at $60, the 23.6% retracement level from its $0 to $76 move from last year. 

Hence, despite many calls from experts that the bull run is over for oil and while news flow seems skewed in favor of bears at the moment, do not rule out this rally in oil yet as strong support levels abound and OPEC+ could still deliver more surprises to the market.