Trade idea of the day: Crude to $70?

Crude oil is experiencing an impressive bounce. It broke through $65 last Wednesday despite concerns over a global trade war and after a series of higher highs, crude today touched a monthly high of $66.45.

What:

Crude oil is experiencing an impressive bounce. It broke through $65 last Wednesday despite concerns over a global trade war and after a series of higher highs, crude today touched a monthly high of $66.45. 

Oil is up 30% in just 9 months and stock piles unexpectedly declined last week giving oil a significant boost. Whilst the OPEC production cuts are being adhered to and supporting prices, it is very unlikely that OPEC are so in control of the market that the sent oil $15 per barrel higher.

There are a few other factors to consider which are still supportive of the price of oil:

•  Tensions between Iran and Saudi Arabia are increasing amid concerns over a nuclear arms race. Crown Prince Mohammed bin Salaman met with Donal Trump last week to discuss the matter, highlighting the level of anxiety that is being created through arms race rhetoric. 

•  Production is decreasing in Venezuela owing to its political and economic crisis. Oil production in Venezuela has declined from 2.2 million barrels per day two years ago to 1.5 million in February and further falls predicted for March. Overall output is less than half what it was when Chavez first came to power in 1999. 

•  The Energy Information Administration reported a decline of 2.6 million barrels last week, snapping three consecutive weeks of gains. 

•  The dollar has been trading lower, despite the Fed hiking rates, as trade war fears have weighed on the greenback. A weaker dollar is supportive of the dollar denominated oil price, making it cheaper for buyers with other currencies. 

On the other side of the equation, US shale production continues to ramp up, pumping oil out at a record pace. At the start of the year 9.5 million barrels per day were being pumped, this had increased to 10.3 million barrels per day – a substantial increase in a short amount of time.  

How: 

Crude has rallied 10.5% over the 12 days breaking through resistance at $65 last week before hitting $66.54, its highest level in a month. 

Whilst the price has pulled back marginally today, this could be a small retrace before crude looks to make a meaningful attack on $66.66 2018’s high, hit on 25th January. 

Beyond that price there is little stopping crude from targeting $70 per barrel. On the downside near term support can be seen at $65.5, prior to $64.25.

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