It is easy to get frustrated at OPEC+ for their weekend decision to cut oil production, but the reality is the global oil markets are not a charity, nor are they socialized or even civilized. It is a marketplace where each party is out for themselves. Whether we like it or not, that is how capitalism works.
In the long run, society is better off if oil market players are working as a team, rather than acting as opponents, but that would be a bonus not something that should be expected. Further, cooperation, as opposed to an antagonistic relationship, requires more than one party to participate.
For years, OPEC and various components of the U.S. energy industry have been at odds. In early 2020 it was shale oil producers sparring with OPEC, in recent years it has been U.S. politicians attempting to thwart oil prices and ruffling OPEC's feathers. However, if we want to compete, we will need to be savvier. Not only are they beating us at the game of oil, but they are also running up the score.
The early 2020 flooding of the oil market was exacerbated by Covid shutdowns, but the writing was on the wall. OPEC+ strategically flushed out inefficient players in the oil market by forcing prices to levels that result in operating losses. The move successfully forced U.S. shale oil producers to trim operations, curtail further investments, and, in turn, shifted control of the global oil market pricing back to the cartel.
Since then, OPEC+ members appear to be far more cohesive. They are operating like a well-oiled machine (no pun intended). This is bad news for consumers, but it could be good news for U.S. oil companies looking for signs of price, and ideally political, stabilization to step up their game.
From the get-go, it was understood that the policy of the U.S. releasing barrels from the strategic petroleum reserve was temporary relief from a long-term problem. That reality is coming full circle.
In my opinion, the OPEC+ weekend production cut announcement was highly strategic and politically motivated. It was likely to put the U.S. on notice and to deter future attempts at artificially depressing prices with SPR releases by making it more difficult to refill the SPR at low prices.
The U.S. now faces a difficult decision to chase prices much higher than expected to refill what was taken, or to live with the decreased security blanket of the SPR. In other words, the U.S. has lost control of its fate unless U.S. producers believe prices are elevated enough and the political landscape is stable enough, to justify working on bringing more supply to the market.
We are of the belief that the recent plunge to $65.00 in oil futures was the capitulation needed to change the trend. Thus far, that seems to be playing out as expected. We are also of the belief that this rally will eventually find its way into the mid-to-high-$90.00s. This likely would have been the case with or without OPEC+ announcing production cuts but the weekend news probably speeds up the process.
Most people believe fundamentals guide technical analysis, but sometimes the opposite is true. It is almost as if market participants search for reasons for prices to reach significant support and resistance levels after those moves have already occurred.
COT Report
According to the Commitments of Traders (COT) Report issued by the CFTC (Commodity Futures Trading Commission), oil speculators (of the large variety) had dwindled their net long holdings to about 180,000 contracts. This is the lowest reading since the 2016 bottom at which time this group of speculators were holding about 200,000 contracts.
The fact that speculators were light coming into the OPEC+ announcement suggests there will be no shortage of buying power should bullish fundamentals continue to emerge.
Chart Source: Barchart
Seasonality
The path of least resistance for oil is generally higher during this time of year with a peak often coming in late May.
Chart Source: MRCI
Daily Chart
Since last June, oil prices have traded in a well-defined trading channel. Despite a few temporary breaches, prices have remained restricted to support and resistance provided by the range.
In my view, that trading range represented a win for both OPEC+ and U.S. energy policy. $70.00 to $80.00 oil is a level producers can make money at, and consumers can live with. However, when human emotions are involved and one side of the equation is feeling one-upped, there aren't any winners because it becomes a never-ending game of tit for tat.
Weekly Chart
The price of oil has been hugging the monthly chart downtrend line for months but hasn't been able to curb the trend. However, if oil closes above $81.00, the seeds of change are likely sown. If and when that occurs, the top of the trading range will act as a vacuum to prices. At the moment, that level comes in near $98.00, but that will decrease as time goes on.
Chart Source: QST
