OPEC+ impasse and delayed Iran deal to support prices.
Strong demand to provide stability.
The Covid-19 Delta variant could spoil the party.
Crude oil’s momentum looks to be strong as market fundamentals remain favorable to the commodity. On Friday, the markets closed, with futures having gained about 2.5% at some point during the day.
In early Monday Asian trading, oil prices were marginally different from their closing levels on Friday, as traders seem to await the unknown from OPEC+. Brent orders for September were trading at $75.50 per barrel, while the WTI went for $74.57, showing a decline of 4¢ and gain of ¢1 for Brent and WTI, respectively.
But, the strongest catalyst of oil price gains in the coming days is likely to be OPEC+. The world’s largest oil trading bloc once again failed to agree on output levels for its members, leaving the market in a state of suspense.
Declining inventories and strong demand absorbing Covid-19 worries
The black gold also got some help from a weakened U.S. dollar heading into the weekend. Further, there has been a consistent decline in U.S. crude inventories, with last week being the seventh successive week with inventories in decline. In addition, a spike in demand for the commodity has helped spur prices as more people travel during the summer.
In the meantime, concerns remain as to the spread of the Delta variant of the Covid-19 global pandemic. There are widespread fears that the variant, which is more easily transmissible and deadlier, could lead to a decline in global economic activity, thus reducing the demand for commodities.
However, those concerns seem to have been absorbed by the success of global vaccinations, with a notable rise in demand for oil in three of the world’s largest consumers, the United States, China, and India. Refineries in the US, for example, are operating near their full capacity as summer travel activities push up demand.
According to the latest report by EIA, the current gasoline demand is the highest since 2019. Barring a blowout of the Delta variant, oil is likely to keep rising. In its latest projection, Goldman Sachs has estimated that the commodity could go as high as $90 a barrel before the summer ends.
The OPEC+ paralysis is good for oil prices
The failure by OPEC+ to reach an agreement has only strengthened the belief that the current oil surge is here to stay for some time. Last week, a proposal by Saudi Arabia to raise the oil cartel’s daily output by 400,000 per month was met by opposition from the United Arab Emirates.
The Saudi proposal had targeted to gradually raise output and return to the pre-pandemic 5.8m bpd by the end of 2022. However, the UAE countered that by demanding that the Saudi proposal only be implemented subject to OPEC accepting an increase in the UAE output quota.
The biggest fear is that implementation of the UAE proposal would result in other member states wanting to raise their own output. This has led to an impasse that is likely to keep oil prices rising.
The impact of Iran’s return to global supply
Apart from the demand-driven price rise and OPEC+, the outcome of the ongoing nuclear deal between the United States and Iran is likely to impact prices. Iran’s election of a new president is likely to bring with it uncertainties concerning the negotiations.
This is likely to complicate matters further, considering that no agreement has been reached yet after six rounds of talks between Iran and the United States. However, if an agreement is reached, then there could be an additional 1.4 million barrels per day coming into the market. Therefore, traders will be closely monitoring developments in the negotiations.
At the time of writing, crude oil was at $73.56. The commodity’s RSI is at 57. This shows that the market has a strong momentum to push prices further up. Oil is likely to find the first support at $72.81.
However, a push by the bears could see it go down to the second resistance level at $70.94. With RSI showing strong momentum, the price is likely to rise to the first resistance level at $74.29. Further gains beyond that point will see the market attempt to break R2 at $77.56.