Rallying on shaky foundations.
This article is originally referred from FXTM Market Forecast Q1 2018.
FXTM Brand does not provide services to residents of the USA, Mauritius, Japan (日本), Alberta, British Columbia, Quebec,
Saskatchewan, Haiti, Suriname, The Democratic Republic of Korea, Puerto Rico, and The Occupied Area of Cyprus. Find out more
in the Regulations section of their FAQs.
Oil prices were undeniably bullish during the final trading quarter of 2017 amid major supply disruptions, geopolitical risk and growing optimism over OPEC’s supply cuts re-balancing markets.
With OPEC agreeing to extend its supply cut agreement until the end of 2018 and robust global demand resulting in a draw-down in inventories, market sentiment seems to be turning increasingly bullish on oil.
While further upside may be witnessed in the short to medium term amid supply side disruptions and market optimism, the question remains for how long?
As we head into Q1, WTI has already jumped to its highest level in over two years on growing expectations that crude stockpiles will continue to decline.
Although oil bulls are likely to continue attacking repeatedly, it must be kept in mind that US Shale remains the greatest threat to higher oil prices.
With WTI trading above $60, shale producers are currently profitable – a factor that could ultimately see them increase production.
If activity in the shale industry rises further this year, this is eventually going to limit upside gains.
When considering how rising U.S production on is on the verge of surpassing 10 million barrels per day, the bullish is outlook is at threat, with oil still vulnerable to downside losses.
While the argument for oil to appreciate further this quarter could be based on improving global growth and continued commitment to production cuts from OPEC, risk associated with cartel members cheating on the agreement could empower bears.
It should also be kept in mind that current prices include a lot of geopolitical risk premium which is not supported by fundamentals.
If the tensions deescalate, we are likely to see a pullback on this factor.
With heavy hitters in the oil markets like the International Energy Agency (IEA) and Energy Information Administration (EIA) expressing concerns over the outlook on oil prices, investors should remain diligent.
The IEA has warned that 2018 will not be a happy year for oil markets, while the EIA predicts that rising U.S supply will push crude prices lower.
Crude Oil vs Shale Oil?
All things considered, questions should be raised over the sustainability of the current oil rally, especially when considering how oversupply fears are still a lingering theme.
As OPEC continues to lose more of its market share from rising U.S Shale production, the cartel may be forced to enforce some “extraordinary measures” in June’s meeting.
Ultimately oil markets still remain a fierce battleground for U.S Shale and OPEC and as such this will likely simultaneously limit upside potential and downside risks.
Technical Analysis on Crude Oil
From a technical perspective, WTI is heavily bullish on the daily and weekly charts with the commodity currently trading at its highest level in two and a half years at above $60.
There have been consistently higher highs and higher lows on both time-frames, while the MACD has crossed to the upside.
With prices slowly breaking out of the range on the monthly charts, there is a possibility of bulls challenging $67.50.
Technical traders will continue to observe how prices behave above $60.
If bulls are unable to secure control above this level, then WTI could decline back towards $55.
Sustained weakness below $55 could place oil back within a $15 range with $40 acting as a support level.
Original Source: FXTM Market Forecast Q1 2018