Oil Price Rally Vulnerable Amid Failure to Test March High

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Oil Price Talking Points

The price of oil pulls back from a fresh monthly high ($66.76) despite a larger-than-expected contraction in US inventories, but signs of subdued supply may keep crude prices afloat as US output remains at its lowest level since 2018.

Oil Price Rally Vulnerable Amid Failure to Test March High

The recent rally in the price of oil appears to be stalling ahead of the March high ($67.98) as it fails to extend the series of higher highs and lows from the start of the week, and crude prices may trade within a defined range with the Organization of the Petroleum Exporting Countries (OPEC) stay on track to gradually restore production over the coming months.

Fresh data prints coming out of the US may encourage OPEC and its allies to uphold the production adjustments table at the next Joint Ministerial Monitoring Committee (JMMC) meeting on June 1 as crude inventories contract 7.99M in the week ending April 30 to mark the January.

Image of EIA Weekly US Field Production of Crude Oil

At the same time, a deeper look at the figures coming out of the Energy Information Administration (EIA) showed US field production holding steady at 10,900K for the second week, and expectations for stronger consumption along with signs of subdued supply instills a bullish outlook for the price of oil as OPEC’s most recent Monthly Oil Market Report (MOMR) emphasizes that “oil demand in the 2H21 is projected to be positively impacted by a stronger economic rebound than assumed last month.”

With that said, the underlying fundamentals may keep the price of oil afloat as US output remains at its lowest level since 2018, but lack of momentum to test the March high ($67.98) may keep crude prices within a defined range as it fails to extend the series of higher highs and lows from the start of the week.

Oil Price Daily Chart

Image of Oil price daily chart

Source: Trading View

  • Keep in mind, crude broke out of the range bound price action from the third quarter of 2020 as it established an upward trending channel, with the price of oil taking out the 2019 high ($66.60) as both the 50-Day SMA ($62.33) and 200-Day SMA ($49.45) still reflect a positive slope.
  • It remains to be seen if the decline from the March high ($67.98) will turn out to be a correction in the broader trend or a change in market behavior as the price of oil fails to retain the upward trending channel from late last year, but the Relative Strength Index (RSI) instills a constructive outlook for crude as the indicator still tracks the upward trend established in March.
  • Still need a break of the March high ($67.98) along with a close above the $67.60 (78.6% expansion) region to bring the Fibonacci overlap around $70.90 (100% expansion) to $71.90 (100% expansion) on the radar.
  • However, lack of momentum to test the March high ($67.98) may push the price of oil back toward the $64.20 (61.8% expansion) region, with the next area of interest coming in around $62.70 (61.8% retracement) to $62.90 (78.6% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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