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Those affected by the recent US hurricanes are of course in our thoughts this week. Rightly so, the fallout from these events is taking centre stage; however, if you think it’s Hurricane Harvey and Hurricane Irma that is driving crude higher, think again…
Sure, infrastructure outages as caused by the storms will dent 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 production cut broke on Tuesday and following this, oil prices rallied sharply.
Crucially, this saw crude put in its highest close since May and then in the next session go on to break above key highs (labelled B). However, we now find prices testing the $54.1 – $54.6 resistance zone (May highs).
Crude 9-month daily candle chart
Taking a step back it’s worth highlighting that crude has been trending steadily higher ever since mid-June – over this period, we have seen 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 sees to reinforce the current ‘buy the dips’ environment.
Momentum favours the bulls
Having seen prices burst higher this Tuesday, short-term momentum has turned firmly bullish and crucially this sees momentum align with the dominant uptrend. Given this, we wouldn’t be surprised to see crude go on and break above the May highs in the near term. Were this to happen, then the April highs would then 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 and given this, traders should look for whether prices go on to find support at either the August 10th high or $53. If so, then we have the foundations for another move higher in line with the dominant uptrend.
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