Crude oil pulled back somewhat on Thursday, giving back some of the gains it posted this month, perhaps due to the strengthening US dollar following the “hawkish” Fed yesterday. Oil traders will probably have a busy end to the week as well, as OPEC and non-OPEC producers are set to meet in Vienna on Friday in order to discuss the effectiveness of their production-cut deal so far, ahead of the big OPEC meeting in November. Even though we may get some optimistic comments from the various officials regarding a further extension or even an expansion of the current deal, we doubt that anything will be decided tomorrow. Indeed, Kuwait’s oil minister noted recently that this committee won’t make a recommendation on whether to change the deal.
Therefore, we see the prospect for oil prices to rebound somewhat on any bullish comments from officials, but we do not expect a major surge in prices, as could happen if something was actually decided. Our view is reinforced by the fact that we are very close to the $51-$55 zone in WTI, where we believe that further price gains may be capped by US shale producers increasing their production notably due to rising profitability.
WTI traded lower on Thursday, after it hit resistance near the 51.00 (S1) line. The price structure continues to suggest a short-term uptrend, marked by the trend line taken from the low of the 31st of August. Having said that though, given the negative divergence between both our short-term oscillators and the price action, as well as the proximity to the key obstacle of 51.50 (R2), we prefer to stand pat for now, as the current slide may evolve into something more than just the correction it looks like now.
Switching to the daily chart, it’s much easier for someone to understand why we decided to remain sidelined despite the short-term uptrend. As noted above, we believe that the the range between 51.50 (R1) and 55.00 is the area where US shale producers may be attracted to increase production. Thus, our proximity to the lower end of that range, increases the possibility of a short-term reversal, as was the case back in May. Even if the price breaks above 51.50 (R1) and enters the aforementioned range, we don’t expect any such gains to lead into a major healthy uptrend.