OPEC Meeting: Risk Of Short-term Pullback In Oil, But Long-run Outlook Remains Bullish

Oil ministers from the Organization of Petroleum Exporting Countries (OPEC) convene in Vienna today for their semi-annual meeting.

The first six months of 2017 saw OPEC and 11 other non-OPEC producers cut output by 1.8 million barrels per day. In May, the deal was extended by another nine months until March 2018. At today's meeting, the members will consider the extension of the 1.8m barrel-a-day production curbs due to expire in March 2018.

The margin of error is low - Neil Wilson from ETX Capital

Wilson writes, "the markets have already priced in some extension to the cuts, with crude futures soaring above $64 a barrel in the expectation that OPEC and the rest will carry on with the scheme. Market consensus suggests a further 6-9 month extension, but no deepening of the overall amount being taken out of the market each month."

"With the markets expecting a deal, the margin for error is low. In May, crude sank after the cartel failed to deliver more than was already expected. The potential for bearish surprise is therefore quite high. Prices may fall in the aftermath if speculative longs sell the fact. Speculative net longs have reached record highs coming into the meeting."

That said, the technical studies also indicate a potential for a short-term pullback.

Brent daily chart

Source: Netdania

The above chart shows-

• The Price action looks toppy as suggested by the lower highs pattern on the RSI.
• Prices are struggling to break above $64.00 handle.
• Two out of last three daily candles are Doji. It signals bull market exhaustion.
• The rising trend line support is seen at $60.32.
• The 50-day MA, 100-day MA and 200-day MA slope upwards, suggesting the long-run outlook remains bullish.

Brent daily chart view - Prices could revisit $60.00 levels, courtesy of the toppy price action. Only an end of the day close below $57.00 would signal a long-term bullish-to-bearish trend change.

WTI daily chart

Source: Netdania

The above chart shows-

• Bearish price RSI divergence
• The RSI has breached the rising trendline.
• Rising trendlines supports are seen at $57.09, $46.48 and $53.90 (also the 50-day MA).
• The 50-day MA, 100-day MA and 200-day MA slope upwards, suggesting the long-run outlook remains bullish.

WTI daily chart view - The bearish RSI divergence is a reversal pattern, i.e. WTI may have found a top at $59.03 (Nov. 24 high) and could suffer a drop to $55.00-$54.80 levels in the short-term. Only a move above $59.03 would signal a continuation of the rally from the June 21 low of $42.06.

Short-term technical conditions are perfectly aligned with the idea of "sell the fact" trade post-OPEC meeting.

What if OPEC disappoints and/or oil prices are sold on fact?

• Oil prices look set to test $78-$80 levels next year.
• The long-run outlook would still remain bullish as discussed in the Brent oil post here.
• Only a close today below last month's low would invalidate the bullish view put forward by the Bollinger band breakout.