Oil Soars As OPEC+ Mulls Huge Output Cut To Defend Prices. What Now For Crude?

By Diego Colman of DailyFX

Tuesday, October 4, 2022 2:22 PM EDT

Oil prices rallied on Tuesday, extending gains from the previous session, with WTI futures jumping more than 3% above $85.00 per barrel, supported by risk-on mood on Wall Street and a softer U.S. dollar. However, the main bullish catalyst has been the news that the Organization of Petroleum Exporting Countries and its allies (OPEC+), who will meet in Vienna on Wednesday to decide on production policy, will deliver a substantial supply cut to stabilize the market, even if physical fundamentals remain extremely tight.

There have been several leaks, but the most credible reports suggest that OPEC+ could slash production by one to two million bpd in an effort to avoid further weakness in the energy space following the sharp sell-off in recent months. By way of context, Brent was trading around $115 in mid-June, but has plunged towards $85 in late September on fears that the global economy could be headed for a damaging recession amid rapidly tightening financial conditions.

The anticipated output reduction is likely discounted by now, judging by how much crude benchmarks have risen since last week, so we may not see a significant reaction to the official decision tomorrow. However, the cartel's actions may act as a floor for the commodity going forward, preventing speculators from triggering another extreme and unwarranted sell-off on weak demand bets.

In terms of the near-term outlook, oil’s prospects appear to be improving. OPEC's apparent intention to defend prices to protect producers’ revenues, improving Chinese demand after the Covid-19 lockdowns, the end of the U.S. Strategic Petroleum Reserve’s releases and the upcoming EU ban on Russian petroleum exports should create a more benign environment for WTI and Brent. This means both commodities may have more upside heading into year’s end.

CRUDE OIL TECHNICAL ANALYSIS

WTI prices have rallied towards a key technical resistance near the ~$87.00 area following recent gains. If bulls manage to overcome this barrier in the coming sessions, bullish impetus could strengthen, paving the way for an advance towards the psychological $90 level. On further strength, the focus shifts to the 38.2% Fibonacci retracement of the March/September selloff at ~$97.00. On the other hand, if sellers return to trigger a bearish reversal from current levels, the first support to take into account appears at $83.50, followed by last month’s lows.