Crude Oil Prices Aiming Higher On OPEC Surprise, Inflation Expectations

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CRUDE OIL FUNDAMENTAL FORECAST: BULLISH

  • Supply constraints, rebounding global demand and rising inflation expectations may drive crude oil prices higher in the near term.
  • Break above 2008 uptrend hints at further gains for oil prices.

Supply constraints have sent crude oil prices storming higher in recent days, as OPEC+ shocked market participants by opting to keep its current output settings steady, despite previously contemplating introducing an additional 1.5 million barrels a day of output next month. Even more surprising was the announcement from Saudi Arabia that it would make the 1 million barrel-per-day voluntary production cut it introduced in February open ended.

This amounts to the cartel withholding 7 million barrels-per-day from the market, and may open the door for crude oil prices to continue gaining ground in the near term. Maintenance works at three of Western Canada’s major oil sands producers will also tighten global supplies further, with a reduction of 500,000 bpd expected next month.

OPEC CRUDE OIL PRODUCTION OUTPUT

OPEC Oil Output

Data Source – Bloomberg

Rising inflation expectations may also serve as a tailwind for crude oil prices, as the rapid rollout of coronavirus vaccines, falling infection rates, and extensive fiscal support fuels speculation that an acceleration in consumer price growth is on the horizon.

Indeed, 5-year breakeven inflation rates have surged to the highest levels in over a decade, and appear to have dragged oil prices along for the ride.

Therefore, rising inflation expectations, supply constraints, and rebounding demand may pave the way for crude oil to extend its recent surge higher in the coming months.

5Y Breakeven vs. Oil Price

Data Source – Bloomberg

CRUDE OIL WEEKLY CHART – BREAK OF 2008 DOWNTREND HINTS AT EXTENDED GAINS

From a technical perspective, the outlook for crude seems skewed to the upside as price surges above psychological resistance at 60.00 and pierces through the downtrend extending from the 2008 high.

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William K. 4 weeks ago Member's comment

Gasoline prices here have climbed fro $1.75 per gallon to $2.55per gallon, all in the last few weeks. So the oil producers are making a lot more profit, it seems.

I wish them "Lots of Luck," and every bit of it BAD !!

Fuel is one of the more consistently required products and so the demand is not so very fluid.