Crude OPEC fuelled rally has just begun

The OPEC put its differences to a side and got its act together to resume its traditional role as a price fixer on Wednesday. The cartel agreed to cut its oil output by a good 1.2 million barrels per day to 32.5 million bpd. The agreement is subject to key non-OPEC members reducing their own output by 600 thousand barrels per day, half of which will be taken care of by Russia. The changes will take effect from the first day of next year.

This is very bullish for oil, make no mistake about it. Yes, oil prices did rally massively already on Wednesday, but that was the unwinding of the downward move from the summer. There’s so much upside potential left in the rally in my view because the market will now be in balance earlier than would have been the case without a deal. Yes, US shale producers will most likely ramp up production again which will ultimately keep a ceiling on prices in the long-term. But in the short to medium term, I think we can expect to see significantly higher oil prices now. What’s more, on top of the now-favourable supply-side dynamics, the global economic recovery is continuing at a steady pace, especially in the US. So rising demand for oil from the US – and China – could be additional factors that could help fuel a rally in oil.

Now up until Wednesday, most people were probably waiting for the OPEC meeting to be over before returning to the oil market. Well, now that we have had that, there is really no reason in my view why they should wait to come back into the market. So, to be clear, I am expecting a bullish breakout above the recent highs now.

For my bullish view to be confirmed by price, we do need to see a speedy breakout above the recent range highs of around $53.00-$54.00 for Brent and $50.00-51.00 for WTI. If seen, the next objective price move for Brent is at $60, a psychologically-important level, followed by $63, the last support level prior to the down move in the summer of 2015. For WTI, the last support prior to its breakdown was at $56.50 with the 2015 high coming in around $62.55. Those are the long-term objectives that we are expecting oil prices to rally towards. Our bullish view would technically become void should we see a false breakout scenario around the above-mentioned range highs.