Last week, West Texas Intermediate (WTI) crude oil prices rose 7.3%. It was the highest weekly gain since June. The upside in oil also helped the United States Oil Fund LP (USO) to gain 6%. Crude oil futures rose because the OPEC+ (Organization of the Petroleum Exporting Countries) surprised the market with a deeper cut. Traders had expected production cut agreement continuation but not a deeper cut.
OPEC+ and Aramco IPO
The OPEC+ will implement 1.7 MMbpd (million barrels per day) output cut from next month until March to support oil prices. However, the group has not said anything about its strategy beyond March. Co-incidentally, Saudi Arabia’s listing of Aramco and OPEC+ falls in the same month.
Per a CNBC report, Saudi Arabia’s energy minister Prince Abdulaziz bin Salman said, “The fact that they coincided, people try to draw a correlation between the two. Some media outlets tried to use that as a way to explain what we are trying to do at this meeting.”
Prince Abdulaziz bin Salman was referring to Aramco’s planned listing and output cut decision. But, he can’t deny the fact that higher oil prices would drive Aramco’s valuation. Crude Oil Prices: After Inventory, Watch OPEC+ explains the possible reason behind Aramco’s IPO.
In the third and fourth quarter of 2020, global oil demand will exceed the supply, based on IEA (International Energy Agency) data. Also, if the OPEC+ will continue with the previous agreement of 1.2 MMbpd output cut, oil prices could move higher. US oil production, the main reason behind lower oil prices, has started to slow.
Also, Saudi Arabia might plan for a further stake sale after Aramco’s listing. It increases the possibility of an extension of the current production cut of 1.7 MMbpd beyond March. These factors could start a multi-year oil’s bull run.
Oil prices and forward curve
On Friday, WTI crude oil futures prices until January 2021 settled in descending order. This pattern in the futures contracts is known as the “backwardation.” To learn more, the article What Could Backwardation Mean for Oil Traders? might be of interest.
Usually, during backwardation oil prices have moved upward. Moreover, the premium between US crude oil January 2020 futures and January 2021 futures could expand further because of the production cut. Any expansion in the futures spread or the premium is considered bullish for crude oil. To know more, read Oil Futures Spread: Bullish Sentiments Fall despite Tanker Attack.
Moving averages and price target
Last week, active WTI settled 2.4%, 5.3%, 4.8%, and 1.7% above their 20-, 50-, 100-, and 200- DMA (day moving average), respectively. Technically, prices above these key moving averages suggest an upturn in oil futures. Between Monday and Friday, the 200-DMA at $57.51 would be an important support zone.
On Friday, WTI crude oil futures’ implied volatility was at 30.1%. According to this volatility, we obtained a price range of between $56.42 per barrel and $60.54 per barrel till December 12. Oil active futures might surpass the $60 level. We already discussed the bullish indicators for oil prices. The price forecast is based on normal distribution and a confidence interval of 68%.
The article Inventory, OPEC+: Will Natural Gas Prices Fall? discusses the impact of possible higher oil prices on natural gas.