Brent crude surges

Crude prices have surged higher today, lifting Brent oil to a new 2017 high. At around $58.80 per barrel, Brent has reached its best level since July 2015. Oil prices have been going higher in recent weeks due first and foremost to evidence that OPEC and Russia’s efforts to reduce the global supply glut was showing positive results and that the group was somewhat surprisingly sticking to their agreement. Indeed, according to the OPEC Secretary-General Mohammad Barkindo, the cartel and its partners had implemented more than 100% of their agreed cuts in August. Talks that the production cuts could be extended has been providing further confidence to oil investors that the rally could be sustained. Everything else is secondary, including North Korean war-talk and anxiety over Kurdish referendum. North Korea is not an oil producer, so I can’t see why the escalation of the situation there would lead to higher oil prices. But Kurdish oil supplies may be hit in the event the Iraqi central government and its neighbouring countries like Turkey and Iran were to isolate the Kurds. A lot of people are also forgetting that demand for oil has been strong, especially from China where the government has been building its strategic petroleum reserve. So, in a nutshell, the fundamental outlook for oil is getting brighter again. However, it remains to be seen what the response from US shale oil producers will be to rising prices. If oil production in the US grows at a faster pace than that of the drawdown in global oil stocks, then this may keep a lid on prices in the medium term. In the long-term, the drive towards alternative energy means the rate of oil demand growth could flatten, which may mean lower prices (assuming everything else is held constant).  

As a result of the sharp rally, both oil contracts now appear overbought in the short-term outlook. I therefore think that oil prices may have to retreat a little from these levels before new buyers are tempted to step in again. But essentially, the trend for both oil contracts is bullish and as such more gains could be on the way in the coming days and weeks. Brent crude has traded above the high it had reached in January at $58.35. Given the size of the previous drop from this level, and the extent of today’s rally, it make sense if we see some profit-taking activity now that this level has been taken out. But if and when Brent moves well north of $58.35 and holds there, then the bulls may set their sights on $60 next. Above this psychological hurdle are two additional bullish objectives that are now not too far off at $62.15 (161.8% Fibonacci extension) and $62.80 (old support/resistance area). Meanwhile there are plenty of support levels on the way down, starting with $56.85/90 – Friday’s high.