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Oil prices trading at multi-year highs following OPEC-plus news


MongiIG

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In this article we break down the OPEC+ decision to limit output increases and look at how crude prices are reacting to the news.

OPEC agrees to extend oil production cuts

 

 Shaun Murison | Senior Market Analyst, Johannesburg | Publication date: Tuesday 05 October 2021. IG

Oil prices trading at multi-year highs on OPEC-plus news

Oil prices have continued to gain, trading to multi-year highs following a meeting between the Organisation of Petroleum Exporting Countries (OPEC) and its allies (OPEC+).

The move higher sees the respective prices of Brent crude and West Texas Intermediate up around 60% year-to-date.

What was decided at the OPEC+ meeting?

During the meeting, members committed to only increase oil output by 400 000 barrels per day. The increase, which will take effect in November this year, equates to less than half a percent of global supply.

The production increase adheres to levels agreed upon at the group's July meeting.

Why is OPEC+ oil production only marginal?

The suggestion from OPEC members has been that despite improving demand, cyclicality and a possible fourth wave of the pandemic (in the fourth quarter) could create demand-side disruptions.

Will oil prices disrupt economic recovery?

Increasing demand amidst the continued throttling of supply is drawing concern from high export destinations such as the US, India and China.

Rising prices as are evident in the commodity right now, can contribute to a sustained period of high inflation questioning the transitory nature thereof suggested by the Federal Reserve.

Fossil fuels which include petroleum, coal and natural gas (among others) still account for the bulk of energy demand globally (at least 75%) and have seen prices soaring this year.

Higher inflation creates higher input costs to many businesses and threatens earlier adoption of tighter monetary policy which could impact the economic recovery.

Brent crude oil – technical analysis

Brent_Crude_4_Oct.pngSource: IG charts

 

In the short-term we see the price of Brent crude breaking above a historic high at 80.60. The short-term move is in line with the longer term uptrend.

The upside break does move the oil price back into overbought territory, however this is considered of less consequence than the primary uptrend firmly in place.

The breakout now targets a move to the next level of historical resistance considered at the 86.50 level. For now, pullbacks from overbought territory are considered buyable at this stage.

In summary

  • Oil prices are trading at multi-year highs following outcomes from the OPEC+ meeting
  • OPEC+ members committed to increase output by 400 000 barrels per day in November The November output increase adheres to output levels agreed upon in July this year
  • Another wave of the pandemic and cyclicality are cited as reasons for the limited production increase announced
  • Higher energy prices threaten to help sustain levels of inflation suggested to be ‘transitory’ by central banks
  • High levels of sustained inflation beckon tighter monetary policy and could threaten the economic recovery
  • Oil prices are breaking out in the short-term to continue their longer term uptrends

 

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