Those affected by the recent US hurricanes are of course in our thoughts this week. Rightly so, the fallout from these events is taking center stage, however if you think it’s Hurricane Harvey and Hurricane Irma that is driving crude oil higher, think again.
Sure, infrastructure outages caused by the storms will dent the US crude supply. However, what investors should be focused on is OPEC.
Cut Production Extension
Reports indicating that Russia and Saudi Arabia are considering extending the current oil production-cut deal was this week’s key event. News that representatives from Russia and Saudi Arabia had talked about an extension to the deal broke on Tuesday, which is when oil prices rallied sharply.
Crucially, crude oil put in its highest close since May and then in the next session, it went on to break above key highs ( point B). However, we now find prices testing the $54.1 – $54.6 resistance zone (May highs).
Taking a step back, it’s worth noting that crude has been trending steadily higher since mid June. During that time, we saw prices bounce off this trendline no less than 5 times. The recent false break of the trendline should be seen as a ‘bullish shakeout’ and only seems to reinforce the current ‘buy-the-dips’ environment.
Momentum Favors Bulls
Having seen prices burst higher on Tuesday, short-term momentum has turned firmly bullish, which crucially finds momentum aligning with the dominant uptrend. That said, we wouldn’t be surprised to see crude oil go on and break above the May highs in the near term. If that happens, then the April highs would be in sight.
Of course, crude rallying sharply over the last few sessions has meant prices have pulled away from trend. Accordingly, a retracement is now more likely, which means that traders should watch for whether prices go on to find support at either the August 10 high or $53. If so, then we have the foundations for another move higher in line with the dominant uptrend.