Oil prices have been coiling for several weeks now with both contracts spending most of their time in a tight four dollar range. Brent has been bouncing around between $54 and $58 while WTI has been stuck between $51 and $55. Crucially, both Brent and WTI have managed to hold their own above their respective 2016 high points, a year when prices surged some 45 per cent. Towards the end of 2016, an agreement by members of the Organization of the Petroleum Exporting Countries with some non-OPEC producers to cut oil output sent prices decisively higher. Since then, oil prices haven’t really gone anywhere but crucially the pullbacks have been very shallow. This suggests that despite renewed worries about supply surplus in the US, market participants are anticipating oil prices to push further higher. Indeed, according to positioning data from the CFTC and ICE, net long positions in both crude contracts hit record high levels last week. While this suggests that the risk of profit-taking is rising, the fact that these long positions have been accumulated during a time when there was no corresponding rise in prices suggests that the pressure is building for a potentially explosive move higher.
So, oil prices appear to be heading higher as the OPEC and some non-OPEC producers stick with their recent agreement. For now, investors are not paying much attention to the situation in the US. Here, supplies are on the rise again: crude and gasoline stockpiles rose to fresh record highs last week as refineries cut output and gasoline demand softened, according to the Energy Information Administration. The next release of the official weekly US oil inventories data is on Thursday, a day later than usual due to the Presidents’ Day holiday on Monday. However, I don’t think the market will pay much attention to this, unless we see some shocking numbers.
From a technical perspective, the tight consolidation above last year’s key broken resistance levels suggests oil prices have been coiling to break higher. The consolidation has also allowed momentum indicators such as the Relative Strength Index and other oscillators to unwind from "overbought" thresholds mainly through time rather than price, which is again very bullish. Consequently, I am anticipating both oil contracts to break out of their recent ranges and head higher. A potential break above $58.35 on Brent could see the London-based oil contract head towards $63.00, the last support pre-breakdown back in June 2015. The corresponding bullish target for WTI is at $60. As things stand, I will only turn bearish on oil if both contracts break back below their recent ranges i.e. at $54.00 on Brent and $50.80 for WTI. That is unless we see other significant bearish patterns beforehand. But for now, we remain pretty much bullish and therefore think that the path of least resistance is to the upside.