How sig­nif­i­cant is WTI’s break­out?

Tehran Times - - ENERGY -

Oil, af­ter look­ing range­bound for a while, al­beit at the high­est lev­els since 2014, looks like it has bro­ken out. When WTI fu­tures chal­lenged Fe­bru­ary’s high of $66.66 a few weeks ago, we reached $66.55 be­fore re­treat­ing rapidly, a pat­tern that re­in­forced the re­sis­tance level and sug­gested that we would head lower again. A cou­ple of days ago, how­ever, we broke through and have been trad­ing above that point for three days now. That con­firms that WTI has bro­ken out of its range, but the lack of fol­low through since sug­gests that this may not be all that sig­nif­i­cant. An anal­y­sis of the rea­sons for the break­out and the price ac­tion since, how­ever, sug­gest that it will be.

The first ques­tion that heeds to be an­swered is how sig­nif­i­cant any tech­ni­cal sig­nal is in the longer term. The an­swer is not very. Even big-pic­ture, clearly vis­i­ble tech­ni­cal anal­y­sis such as this can only take you so far. The break of a level of­ten trig­gers stop loss or­ders clus­tered around it, so can cause a quick jump that traders can ex­ploit in­tra­day, but over time more pow­er­ful fun­da­men­tal forces hold sway. It is those fun­da­men­tals that forced oil higher this week.

The de­mand fac­tors that have been in play for nearly a year now are well known. Im­prov­ing global and U.S. growth sug­gest higher oil de­mand and the mar­ket has re­acted ac­cord­ingly. What changed this week, how­ever, was the sup­ply side of the equa­tion. Con­ven­tional wis­dom has held that that was a re­strict­ing fac­tor for oil prices. The seem­ing abil­ity of North Amer­i­can shale pro­duc­ers to turn pro­duc­tion on and off in re­sponse to price moves sug­gested that the run up would prompt big in­creases in sup­ply. That is still a pos­si­bil­ity, but what changed this week was the sup­ply pic­ture else­where.

Mid­dle East ten­sions and con­flicts are noth­ing new for oil traders, nor for any­one else for that mat­ter. They have ex­isted for mil­len­nia and the oc­ca­sional flare-ups are some­times taken in stride by the mar­ket. The re­ac­tion to Syria’s Pres­i­dent As­sad us­ing chem­i­cal weapons against his own peo­ple, how­ever, has the po­ten­tial to be very im­pact­ful.

There are calls for a re­ac­tion greater than the tar­geted strikes em­ployed by Pres­i­dent Trump last time and that has traders wor­ried. There has been talk from OPEC this week about ex­tend­ing their pro­duc­tion cuts into next year, but if the proxy war in Syria heats up the prospect of a uni­fied front by the sig­na­to­ries to that agree­ment are se­ri­ously re­duced. If the Vienna agree­ment were to break down just as U.S. shale pro­duc­ers are ramp­ing up pro­duc­tion, it doesn’t take a ge­nius to con­clude that oil will be hit hard.

All of that, how­ever, is spec­u­la­tion, and if we re­turn to the re­cent price ac­tion there are sug­ges­tions that the mar­ket is not wor­ried. Even as Trump has been tweet­ing out con­tra­dic­tory sig­nals this week and the IEA has is­sued a re­port that they ex­pect the sig­na­to­ries to the Vienna agree­ment to de­clare “mis­sion ac­com­plished”, WTI has held above the pre­vi­ous highs. That in­di­cates one of two things. Ei­ther traders are not wor­ried about the ef­fects should that be the case, or sim­ply don’t be­lieve it will hap­pen.

Over­all, then, while tech­ni­cal lev­els and break­outs are not usu­ally too sig­nif­i­cant in the long term, the lack of volatil­ity fol­low­ing the ini­tial push up­wards sug­gests that this one may be. We are still close enough that a drop back be­low $66 could come and re­turn us to the pre­vi­ous range but form­ing a new range of around $66-$75 looks more likely.

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