The energy complex has sold off following a surprise announcement by OPEC that they are considering an increase in production as early as next month. The drastic reduction in Venezuelan oil production did most of the heavy lifting for the oil cartel as Brent crude hit OPEC’s price target of $80 per barrel. While the announcement triggered upfront selling, the market should start trading sideways over the short-term. Right now, it’s a matter of identifying a reasonable area for buyers to step back into the market. Between August 2016 and September 2017, the crude oil market was in a rough equilibrium with price maintaining a $10 to $15 trading range from its highs. Applying the same range to the most recent high near $73 gives us an estimated support level between $63 and $58 per barrel. This coincides well with a previous area of congestion that offers a range of support between $60 and $58.
A lot of factors that can influence this outlook are up in the air. We do not know the extent to which OPEC and Russia will increase supply. We have not seen the end of the economic crisis in Venezuela, and their oil production could degrade further. Geopolitical tensions in the Middle East and Korean peninsula can prop up price on a moment’s notice.
On the technical side, we’ll be looking for buyers to show up around support at $66-$64 if they are brave enough to step in front of the headlines. Risk appetite appears to be failing in the market overall as treasury yields fall and the outlook on the Eurozone via Italy worsens. Equity markets are lagging the fall in treasury yields, indicating we may see a volatile push lower.
ULSD & RBOB