Oil Report : Getting out of the triangle

Oil prices have shown signs of regaining bullish momentum, rebounding from the previous week’s WTI price. Today on the fundamental side we maintain our worries for the demand side of the oil market stemming from China, given the release of its NBS manufacturing PMI figure. The figure showed that Chinese factories are still struggling, yet our main focus is to be on OPEC+’s meeting and on the sideline also comment on two emerging issues, namely the possibility of a war between Venezuela and Guyana as well as the Russian expansion in the Middle East. The report is to be concluded with a technical analysis of WTI’s daily chart.

Oil: Overview Report

OPEC+’s meeting

OPEC+’s meeting started actually before today as negotiations between Saudi Arabia and African producing members were ongoing and were not concluded, practically pushing the OPEC+ meeting from Sunday to today. It should be noted that Reuters reported that a preliminary agreement has been reached for a cut of more than 1 million barrels per day (bpd). With production cuts about to end at the end of the year, focus is now being placed on 2024 and the hawkish intentions of Saudi Arabia, are widely expected.

For the time being our base scenario is for the production cuts in place to be rolled over in the first months of 2024 and at the same time Saudi Arabia to gather an alliance within the oil-producing cartel that could abide to additional voluntary cuts. Such a scenario could may imply that Saudi Arabia and Russia may have to deepen their current voluntary production cuts in place, namely 1million and 300 thousand bpd respectively.

Overall we expect that should the meeting point towards additional production cuts it may signal once again a tight supply side for the international oil market, which may counter any worries for a weak demand and thus provide fundamentally a new push higher to oil prices.

Venezuela at war with Guyana?

Another issue that caught our attention is the possibility of Venezuela declaring war on Guyana over the oil and mineral-rich region of Esequiba. We note that the territory was disputed over decades and Venezuela is to hold a consultative referendum on Sunday over the issue. Should the referendum be in favor of Venezuela annexing the area, we expect diplomatic tensions to rise. A far wider escalation is expected should Venezuela actually proceed with military action in order to occupy the area.

Regardless of what is just or not, we do not take a stance on the issue as such. Heightened tensions could lead the US reinstating sanctions on the selling of Venezuelan oil and thus increase the pressure on the production side of the international oil market. May we remind our readers that one of the reasons oil prices had started to drop was exactly the easing of US sanctions on Venezuelan oil in the past months. The threat is exactly that such an easing may be reversed and exercise upward pressure on oil prices.

Russia locking in Iraq deal

In the Middle East, Russia’s influence seems to be expanding. It’s characteristic that various media outlets, highlight that Russia is about to take control over Iraq’s biggest oil discovery for 20 years, namely the Eridu oil field. Inpex decided to sell its 40% stake in the Block 10 region which contains the Eridu field according to media, which practically enables Lukoil to take enhanced control over the oil-rich area. To place a figure on how important the field is, it is estimated to have reserves of 7-10 billion barrels.

On a political level, should Russia along with China be able to control the majority of Iraq’s oil production that could practically increase their influence over the whole region and given the tensions in the relationship between the Russia-China axis and the West, we may see worries for the supply side of oil prices intensifying. The issue is strategic and may require a certain depth of time to come to a level to materially affect the market, yet it is well noted.

Oil: Technical Analysis

WTI Cash H4 Chart

• Support: 75.00 (S1), 70.00 (S2), 66.85 (S3)
• Resistance: 79.65 (R1), 83.00 (R2), 85.55 (R3)

WTI’s price as the week began bounced on the 75.00 (S1) support line. The movement of the commodity’s price tended to highlight the interruption of its prior downward movement. For the time being we tend to maintain a bias for a sideways motion between the 79.65 (R1) resistance line and the 75.00 (S1) support line. It should be noted that the RSI indicator is nearing the reading of 50, implying a rather indecisive market which may allow the sideways motion to continue. Yet we highlight that WTI’s price action was able to breach the symmetric triangle it was in, since the 14th of November to the upside, by more than 3%, in a bullish signal.

Nevertheless, for a bullish outlook, we would require the commodity’s price to break the 79.65 (R1) resistance line which was touched earlier today and aim for the 83.40 (R2) resistance hurdle. Should the R2 be broken, we may see WTI’s price aiming for the 87.50 (R3) resistance nest, a level not visited by WTI’s price action since the 23rd of October. Should the bears be in charge of the commodity’s price action, we may see it reversing the gains of today and the past two days, breaking the 75.00 (S1) support line and aiming for the 70.00 (S2) support base. For an even more intense bearish outlook, we note the 66.85 (S3) support barrier, a level proving its worth repeatedly near the end of May and beginning of June.

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