In the mood for crude
04/19/18

Round numbers have a way of catching traders’ eyes, so when a headline along the lines of “Saudi Arabia Wouldn’t Mind $100 Oil” hits the wire, people are probably going to take notice.

That’s what happened yesterday when reports circulated that Saudi officials in “closed-door” meetings were lobbying for crude oil prices of $80/barrel or higher,1 which is around $11.50 (around 17%) above current futures market levels.

Crude oil is the world’s most actively traded commodity, and $100 is a big, fat round-number. A reasonable target? Who knows. (Over what time period, for instance? More on that later.) Saudi Arabia is the world’s second-largest oil producer, and as the big dog in the 14-nation Organization of the Petroleum Exporting Countries (OPEC) cartel, they can certainly affect the market—as they arguably have in recent months by limiting production to help induce higher prices, which have been rallying since July of last year—the largest and longest uptrend since 2010–2011.

July WTI crude oil (CLM8) 1/26/16 – 4/18/18. Crude oil weekly chart. Uptrend

Source: OptionsHouse

Yesterday crude oil pushed to its highest level since early December 2014 (when it was nearing the end of its epic collapse that year) and lately has been given an extra bump by Middle East tensions (i.e., Syria). June WTI crude oil futures (CLM8) are up more than 9% since April 6, and yesterday’s 3%-plus rally conveniently pushed prices above the round-number level of $68, putting the even-rounder $70 target in the market’s sights.

This isn’t the first time in recent months the Desert Kingdom has voiced its support for higher oil prices. In November the Saudis campaigned for the $100 level, seen by some at the time as a move to fill budget holes (the country has large domestic social spending obligations) and bolster prices ahead of the highly anticipated IPO of Aramco, the Saudi state oil company.2

The IPO—which could be the largest listing in history—was supposed to take place in 2018, but last month the Saudis suggested they were in no rush, and could push the launch into 2019.3 This happens to coincide with the life expectancy for the current production cuts, which the Saudis have indicated they will not reverse until next year.

Although saying “$100 crude” is a lot easier than actually moving prices to that level, about the only people who are likely to balk at higher oil prices are consumers, who would be shelling out more at the gas pump (and through hidden increases in shipping and production costs). The American fracking industry (the US is currently the world’s biggest oil producer), for example, is unlikely to complain about higher prices for its product.

July WTI crude oil (CLM8) 1/26/18 – 4/18/18. Crude oil daily chart.

Source: OptionsHouse

2019 is still a long way off, though. The weekly chart of June WTI crude oil showed the market’s February correction took prices back to the support level (formerly resistance) defined by the January 2017 and the top of the November–December 2017 trading range. The daily chart above shows the market is about as far from the current short-term uptrend line as it got during its February and March rallies. If the market follows through immediately on yesterday’s jump, some bullish traders may prefer to wait for prices to cool a bit.

But until the market at least makes a lower swing low (or more than one lower swing high), the uptrend is still intact. And traders can ponder other round numbers.

 

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1 Reuters. OPEC's new price hawk Saudi Arabia seeks oil as high as $100 - sources. 4/18/18.

2 Forbes. Saudi Arabia Would Take Oil Prices Back To $100 Again. 11/6/17.

3 Bloomberg. Saudi Oil Minister Says Aramco IPO Could Be Delayed to 2019. 3/8/18.