Crude Oil Prices Trade Steadily Above $90 on Demand Optimism, Tight Supply

[MongiIG]

CRUDE OIL PRICE OUTLOOK:

• Crude oil prices are trading above the $90 bbl mark as a strong US jobs report boosts demand optimism
• OPEC+ agrees to increase output by 400k bpd from March, which may be insufficient to meet rising demand
• Oil prices are trending higher within an “Ascending Channel”, underscoring a strong upward trajectory

Crude oil prices pulled back slightly during Tuesday’s APAC mid-day session, yet still hovered at 7-year highs. WTI is trading near $91 bbl, and Brent is above $92 bbl. Prices are supported by a much stronger-than-expected US nonfarm payrolls report, which underscores tight labor conditions and robust wage gains. This suggests that the underlying economy is more resilient than people had anticipated and may be strong enough to withstand the impact of surging Omicron cases. Against this backdrop, demand for energy is expected to remain solid, buoying oil prices.

On the supply side, an OPEC+ commitment to raise output by another 400k bpd in March doesn’t seem to be sufficient to ease market concerns about supply shortages. The oil cartel is on course to gradually unwind record supply cuts of roughly 10 million bpd, which were put in place during the onset of the Covid-19 pandemic in 2020 (chart below). The pace of output appeals to be slow however, as the alliance resists pressures from top consumers such as the US to pump more to aid economic recovery.

Total OPEC Production vs. WTI Crude Oil Price

Source: Bloomberg, DailyFX

Besides, oil prices are also supported by heightened geopolitical tensions between Russia and Ukraine, as the former has massed troops along the border. Ukraine is a crucial transit hub for oil and gas between Russia and the European Union, transporting 11.9 million metric tons of crude oil between them in 2021, according to S&P Global. Therefore, ongoing frictions along the border will likely disrupt supply in an already tight market, pushing oil prices even higher.

In the near term, oil prices may ride the tailwind of supply-demand imbalances, insufficient OPEC+ output increase and heightened geopolitical tensions. Some negative catalysts include US-Iran nuclear talks, which may reignite hopes for more Iranian oil supply.

Technically, WTI is trending higher within a “Ascending Channel” as highlighted on the chart below. The upper and lower bound of the channel may be viewed as immediate resistance and support levels respectively. A key resistance level can be found at around $94.60 – the 261.8% Fibonacci extension. The MACD indicator is trending higher above the neutral midpoint, suggesting that prices riding a strong uptrend but may be vulnerable to a technical pullback.

WTI Crude Oil Price – Daily Chart

 

--- Written by Margaret Yang, Strategist for DailyFX.com. 8th Feb 2022