Oil : next band of resistance between $97 and $100
By Ole. Hansen, Head of Commodity Strategy, Saxo Bank
The energy sector continues to lead the broad rally in commodities with crude oil’s current unstoppable rally extending into a seventh week. As long as the 21-day moving average is not broken, the potential for further upside gains towards the next band of resistance between $97 and $100 remain.
Both WTI and Brent reached new cycle highs above $90 with rising front-month spreads signaling increased tightness. The combination of tight supply, inflation, the weaker dollar and the current turmoil in stocks and bonds are likely to have driven increased demand from paper investors, with asset managers and speculators at large funds seeking a haven to help weather the storm currently blowing across their traditional investment portfolios.
In addition, support continues to be provided by geopolitical tensions, freezing weather in Texas which has hit some supply, and the latest weekly EIA stock report showing another drop in US crude inventories with production now down some 300k barrels per day since December. Fundamental data pointing to a fast-tightening market was supported this week after OPEC+ agreed to proceed with another 400k barrels per day increase while at the same time failing to address the growing gap between quotas and what is being produced.
The oil bears – if there is anyone left – may view this as a sign that OPEC+ stick to their belief oil markets will be ample supplied once we get through the peak winter-related demand. The oil bulls meanwhile have read the lack of action as a sign that no action can currently be taken with just a few producers being able to ramp up production. Any unilateral decision by countries like Saudi Arabia and the UAE to temporarily ramp up production may end up leaving a wafer-thin level of spare capacity and with that a risk of spiking prices into an unforeseen supply disruption.
Global oil demand is not expected to peak anytime soon and that will add further pressure to available spare capacity, which is already being reduced monthly, thereby raising the risk of even higher prices. This supports our long-term bullish view on the oil market as it will be facing years of under investment with oil majors diverging some of their already-reduced capital expenditures towards low-carbon energy production. No doubt both WTI and Brent increasingly need to consolidate their strong gains but as long as the 21-day moving average is not broken, the potential for further upside gains towards the next band of resistance between $97 and $100 remain.
