Oil Price Recovery Unfazed by Unexpected Rise in US Crude Inventories

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Oil Price Talking Points

The price of oil snaps the series of lower highs and lows carried over from the previous week as it extends the rebound from the monthly low ($66.44), and crude may stage a larger recovery over the remainder of the week as it appears to be unfazed by an unexpected uptick in US inventories.

Oil Price Recovery Unfazed by Unexpected Rise in US Crude Inventories

The price of oil attempts to retrace the sharp decline following the agreement by the Organization of Petroleum Exporting Countries (OPEC) to boost production“by 0.4 mb/d on a monthly basis starting August 2021, with crude trading back above the 50-Day SMA ($69.89) as it climbs to a fresh weekly high ($70.15).

The limited reaction to the 2.108M rise in US inventories raises the scope for higher oil prices as it comes after nine straight weeks of falling stockpiles, and the data may do little to sway OPEC and its allies as the most recent Monthly Oil Market Report (MOMR) emphasizes that “world oil demand growth in 2021 is forecast at 6.0 mb/d, unchanged from last month’s assessment.”

In turn, the rise in US inventories may prove to be temporary as consumption is expected to pick up throughout the second half of the year, and forecasts for stronger demand may keep OPEC and its allies on a preset course as the recent recovery in US output seems to be stalling.

Image of EIA Weekly US Field Production of Crude Oil

A deeper look at the figures coming out of the Energy Information Administration (EIA) showed weekly field production holding steady at 11,400K for the second week, and the tepid recovery in US production may help to keep the price of oil afloat ahead of the next OPEC and non-OPEC Ministerial Meeting on September 1 as the group pledges to “to assess market conditions and decide on production level adjustments for the following month, endeavoring to end production adjustments by the end of September 2022.”

With that said, recent price action raises the scope for higher oil prices as it snaps the series of lower highs and lows from the previous week to trade back above the 50-Day SMA ($69.89).

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 ($69.89) and 200-Day SMA ($56.93)established a positive slope.
  • The price of oil may continue to exhibit a bullish trend as the recent rally removes the threat of a double-top formation, but crude appears to have reversed course after taking out the 2018 high ($76.90), with the Relative Strength Index (RSI) highlighting a similar dynamic as it established a downward trend after flashing a textbook sell signal earlier this month.
  • However, the price of oil snaps the series of lower highs and low from the previous week following the failed attempt to close below the $65.40 (23.6% expansion) region, with a break/close above the Fibonacci overlap around $70.40 (38.2% expansion) to $71.50 (38.2% expansion) opening up the $74.40 (50% expansion) region.
  • However, lack of momentum to break/close above the Fibonacci overlap around $70.40 (38.2% expansion) to $71.50 (38.2% expansion) may keep the price of oil within a defined range as long as the RSI tracks the downward trend established earlier this month.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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