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Oil: Heavily Overbought Market Will Continue Rising, Pushing Price Limits

By Investing.com (Barani Krishnan/Investing.com)CommoditiesOct 05, 2021 04:10AM ET
www.investing.com/analysis/oil-heavily-overbought-market-will-continue-rising-pushing-price-limits-200604002
Oil: Heavily Overbought Market Will Continue Rising, Pushing Price Limits
By Investing.com (Barani Krishnan/Investing.com)   |  Oct 05, 2021 04:10AM ET
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It’s already up about 60% or more on the year, and all indications are that it’s massively overbought and due to correct. Yet, like anything where its implied demand attracts more attention than its actual use, oil prices are expected to continue rising.

This is especially after Monday’s move by OPEC+ to reject any notion of adding more supply than it has committed to a market of which it was in absolute control. Prior to Monday’s meeting of the 23-nation oil producing alliance, there had been speculation it might agree to adding beyond the 400,000 barrels per day of new supply it had committed to through end-April.

But once the video linkup was over among the 13-member Saudi-led Organization of the Petroleum Exporting Countries and their 10 allies steered by Russia, the message was clear: there would be no change.

There was no official statement on the matter either. But a Saudi official told the Wall Street Journal that “the kingdom is comfortable with the current price range and feels it won’t weigh on demand for oil.”

Oil Daily
Oil Daily

All charts courtesy of SK Charting

Filling in the blanks were more off-the-record comments from OPEC+ delegates. One who actually told Reuters:

"We are scared of the fourth wave of corona; no one wants to make any big moves.”

That sounds like a tinge of drama given the flat-lining caseloads for the Delta variant over the past few weeks and OPEC+’s monthly (or as-required) virtual meetings that allows the group to pull back production whenever necessary.

The alliance’s virtually unchallenged hold on supply-demand is another reason that allows OPEC+ to do as it pleases. The “Drill baby, Drill!” battle cry associated with the American oil industry has vanished and in its place are drilling companies that are more risk-averse than ever in the seven years that shale oil became a global phenomenon.

The once freely-spouting Permian and Bakken oil basins of America are producing way-below capacity as drillers try to please their shareholders with dividends instead of frustrating them with losses like before. It’s fair to say the industry’s new maxim is: if it ain’t broken, don’t fix it (i.e., if OPEC has control of the market, don’t be a hero trying to challenge it).

As Scott Sheffield, who heads US oil driller Pioneer Natural Resources (NYSE:PXD), told the Financial Times last week:

“Everybody’s going to be disciplined, regardless whether it’s $75 Brent, $80 Brent, or $100 Brent. All the shareholders that I’ve talked to said that if anybody goes back to growth, they will punish those companies share prices."

And if there were any illusions, Sheffield makes absolutely clear that the oil market is “really under OPEC control”.

Mike Wirth, CEO of Chevron Corp (NYSE:CVX) another major US oil driller, told Bloomberg News lately:

“There are two signals I’m looking for and I’m only seeing one of them…We could afford to invest more. The equity market is not sending a signal that says they think we ought to be doing that.”

As Bloomberg energy columnist Liam Denning noted in a commentary on Monday:

“The flood of dollars into shale for much of the past decade suppressed the price of barrels, just as cheap money suppressed the price of ride-sharing or flexible office space.”

“Fracking is more efficient than it was 10 years ago, but investors now demand more, a lot more. Similarly, the costs of maintaining and repositioning petrostate economies mean the famed low-cost production of OPEC+ members isn’t quite as low cost as advertised.”

Oil Weekly
Oil Weekly

Yet, neither OPEC nor US drillers seem to have the will to turn out more barrels even with crude prices returning to 2017 highs and five-year seasonal inventories in the developed OECD countries—a key marker for the industry—being well below targets.

There are, of course, valid reasons why US drillers seem to have lost their marbles for risk, with the emasculation begun by none other than President Joe Biden himself with his fossil-fuel killing policies. While the world certainly needs greener energies, it also needs to sustain its citizens with “real alternatives” till it gets to that transition.

And if oil prices are this high, it’s because natural gas has rocketed even more, up 130%, and projected substitution of oil for gas to make up for winter heating is adding to the crude rally.

Still, if oil prices continue rising, ultimately “the damage to economic recovery, and thereby oil demand, may decide things rather than the considerations of suppliers” Denning, the Bloomberg columnist, noted.

This is essentially my point too, from a late September post that “anyone who has dabbled with commodities long enough will know the saying ‘the cure for high prices is, high prices.’”

I wrote then that:

“Barring need, if the premise of demand is that one would only be able to pay what one could afford, then demand destruction is likely to set in if oil and natural gas prices keep rising and rising.”

Oil Monthly
Oil Monthly

So, the big question: How far could oil go in the near-term?

As most of you may know, Goldman Sachs is bent on making its $90 call for Brent a self-fulfilling prophecy (if that many people say it and believe, the market will get there, whether it’s justified or not. Analysts at Standard Chartered certainly do not think current pricing is justified and lay out their case in this blog that ran on nasdaq.com.

On my end, Sunil Kumar Dixit, chief technical strategist at SK Charting in Kolkata, India, and a regular contributor to Investing.com, breaks down the US West Texas Intermediate crude benchmark, explaining why it can continue rising to push the limits of market endurance—despite already being heavily overbought.

Said Dixit:

“WTI prices have maintained bullish momentum throughout the monthly, weekly and daily charts with Stochastic Relative Strength Index readings perched on overbought territories, without hardly any significant downside swings in recent couple of weeks.”

He said based on moving averages, “prices are going to stay strong as long as the 200-month's Simple Moving Average at $69.88 holds good.”

“Oil price action below the 5-Day Exponential Moving Average of $76.58 and the 5-week EMA of $74.52 should be seen as credible signs for beginning of price distribution and correction towards the 200-month SMA of $69.88. This also aligns with the 50% Fibonacci retracement measured from July high of $77.17 to the August low of $62.05.”

He added that on the extended rally, the 123.6% level at $80.73 should be the next target followed by the 138.2% level at $82.95.

“The strong resistance zone could be the 150% level at $84.73 and the 161.8% level $86.51—if this market even respects resistance.”

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.

Oil: Heavily Overbought Market Will Continue Rising, Pushing Price Limits
 

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Oil: Heavily Overbought Market Will Continue Rising, Pushing Price Limits

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Comments (8)
Ebuka Samuel
Ebuka Samuel Oct 06, 2021 5:30PM ET
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hello good day sir
John Brannon
John Brannon Oct 05, 2021 9:27AM ET
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Good article Barani. Earlier in the year I believed the Fed might have been correct about inflation being transitory, as gauged in a few months, due to the temporary effect of all the stimulus. I couldn't have imagined the giant mess that would become of the worldwide supply chains and all of its accompanying inflationary pressure. Or the inflationary pressure of energy in Asia and Europe. Inflation has certainly not been as transient as was predicted by many. A soft landing may prove to be very difficult.
Barani Krishnan
Barani Krishnan Oct 05, 2021 9:27AM ET
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Greetings, John, Thanks and yes, it's absolutely insane how inflation has been going and you still have ignoramus salivating over the money they can make near-term on oil versus the medium/long-tern damage to the economy from this. You're right that there's no soft landing that can be seen out of this. The Fed will have to forcefully raise inflation to get a handle on the situation because these softy-softly approaches don't work.
Todd Holaday
Todd Holaday Oct 05, 2021 9:27AM ET
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Barani Krishnan You said something that caught my eye here. Fed would have to forcefully RAISE inflation. I think i understand the logic behind that but isnt one of the Fed’s two core missons to keep inflation in check?
Barani Krishnan
Barani Krishnan Oct 05, 2021 9:27AM ET
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Todd Holaday  Apols, typo and just noticing. Thanks for bringing it to my attention. I meant raise RATES. Not inflation for sure, which they're responsible for keeping at 2% or below. Of course, you and I know that's not where inflation stands now :) Thanks and bests, mate!
MAHINDRA REDDY Marthala
MAHINDRA REDDY Marthala Oct 05, 2021 8:09AM ET
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pls share any news regarding NATURAL GAS SIR
Wankel YU
Wankel YU Oct 05, 2021 7:49AM ET
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target 208🍺🍺🍺🍺
Barani Krishnan
Barani Krishnan Oct 05, 2021 7:49AM ET
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Read about a certain gentleman called Arjun Moorty of Goldman Sachs. Then come back with your $208.
Louis Lipps
Louis Lipps Oct 05, 2021 6:31AM ET
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Like it's okay for big tech companies to make money hand over fist by overcharging for their product and buying back all their shares but god forbid an energy company decides it needs to pay off debt and maybe throw a little to their shareholders.
Tyrese Lee
Tyrese Lee Oct 05, 2021 6:31AM ET
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Exactly!!
Louis Lipps
Louis Lipps Oct 05, 2021 6:29AM ET
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Perma bear.  How much you lose in this market?  lol.  I could actually feel the hate and disgust coming through your fingertips as your typed this article.  Let's face it.  You were wrong.  Very wrong.
Show previous replies (14)
Barani Krishnan
Barani Krishnan Oct 05, 2021 6:29AM ET
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Louis Lipps  All's fair weather and when you're looking at just the weather, it can go either way. Yes, all prognosis are for an extremely cold one but in the event that doesn't pan out, we may just squeeze through with what's underground. I still remember double-digit gas pricing from 2006-7 and we are still fairly insulated now compared to then. We also had a hurricane that overstayed this year -- yes they come each year -- but the impact this time was pronounced. So it's not just consumption -- there are other drivers that have added to the price fervor. Travel is depressed, no doubt, but its full return will also be dependent on economic recovery. Long story short: You simply cannot bust the economy and expect the oil price to go the moon and stay there. Everything about Economics 101 will tell you that.
Louis Lipps
Louis Lipps Oct 05, 2021 6:29AM ET
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Barani Krishnan  I'm not sure where you are.  Here in the states I don't think they are predicting a cold winter.  Europe is a different story so I'm assuming you must be there.  I think Russia is screwing with them because of the pipeline issues which is killing their market.  In my opinion on of two things will cause the next recession and it will be bad.  High energy prices.  Or the bubble bursting of the out of control housing market and to a lesser extent the automobile market.  Personally I'm up probably $500k in energy this year.  I've largely stayed away from US E&P but own a ton of PTR, medium position PBR and decent size position MRO.  That's really my only US E&P.  I own midstream and there is def quite a bit of pipeline capacity available but these companies are pumping like you and I both know they can.  For me, most of my money is in refiners.  Cash flow machines right now.  My goal is to get out before the crapola hits the fan.  Good convo.  Hope we both make money.
Louis Lipps
Louis Lipps Oct 05, 2021 6:29AM ET
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Barani Krishnan  I don't think oil prices at $80 qualifies as to the moon, do you?  I know it's been a rough few years but give me triple digits for 6 months and I'd agree with you.  Do I actually think we go $100 for six months, I don't?  But with the current administration here, Canada and Europe I wouldn't be surprised with anything.
Louis Lipps
Louis Lipps Oct 05, 2021 6:29AM ET
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Barani Krishnan  Boslego.  Now that's a name I haven't heard in ages.  The anti HFIR I guess you could call him.  Hope he's well he hasn't posted in a while.
Barani Krishnan
Barani Krishnan Oct 05, 2021 6:29AM ET
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Louis Lipps  I think he's well but now that you mention it, I probably need to check him up. Bests and nite.
Stanton Cameron
Stanton Cameron Oct 05, 2021 5:26AM ET
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Well done!!!
Meru Pet
Meru Pet Oct 05, 2021 4:55AM ET
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Can the US change their policy about oil or are they afraid to lose their face ? (+ being criticised by urban liberals)
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Louis Lipps
Louis Lipps Oct 05, 2021 4:55AM ET
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Barani Krishnan  And the debt ceiling has zero to do with Biden. The house has power of the purse.  This energy crisis is 100% on the left.  Both in the US and abroad.  You're going to get $200 oil prices unless they change their tune bank it.
Barani Krishnan
Barani Krishnan Oct 05, 2021 4:55AM ET
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Louis Lipps  The debt ceiling itself has nothing to do with Biden (yes, it has every thing to do with the Trump administration that spent the money and now refuses to foot the bill). The crisis in Congress, however, has as much to do with Biden and his difficulty in getting a proper reachout to the far left. From Keystone on his day one to the systemic emasculation of drilling, it was triggered by the ultra libs which he has to contain. Perhaps oil at these prices will make this group see the fruits of their destruction.
Todd Holaday
Todd Holaday Oct 05, 2021 4:55AM ET
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Barani Krishnan Im not an expert but it feels a bit much to blame the current debt ceiling problem entirely on a Trump adminstration. That sounds very partisan. You can probably make the case as you are very capable but to me the stimulus spending was very bipartisan in ‘20 and liberally increased by the current president and congress - see additonal Jan ‘21 stimulus, extended unemployment benefits and extended monthly child credit benefits. The current government also wants to exacerbate the problem by 4.5 trillion. And of course there’s the 120 billion of extra liquidity injected by the Fed each month.
Todd Holaday
Todd Holaday Oct 05, 2021 4:55AM ET
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Todd Holaday Other than that one statement though Im in complete agreement. I also found the debate with Lipps entertaining and educational. Thanks, both of you.
Barani Krishnan
Barani Krishnan Oct 05, 2021 4:55AM ET
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Todd Holaday  To each his own .. ha ha .. Thanks to you too for all the great feedback!
 
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