On Wednesday, oil futures gained more than 9% as some of the world’s largest producers agreed to curb output for the first time since 2008, with the Organization of the Petroleum Exporting Countries agreeing to cut production to 32.5 million barrels per day. The cuts include Iraq reducing output by 200,000 barrels per day to 4.351 million barrels per day beginning in January. The country had previously resisted cuts, providing a hurdle to an agreement. Russia plans to hold a meeting on Dec. 9 to discuss details of a 600k barrel per day non-OPEC production cut.
Oil futures extended yesterday’s surge in today’s session, with the contract for January delivery on the New York Mercantile Exchange rising to a 6-week high with a move to $51.80. Settlement was at $51.06, up 3.3%.
As a result of today’s upside follow through, the January contract broke above the next level of resistance at the $50.30 level, leaving the next target at the October highs at the $52.74 level. These highs represent tests of the highs established in the latter part of June. Above this level, key resistance is at the June peak at $53.72/barrel.
Longer term, the contract is back up against what appears to represent the neckline of a major head and shoulders bottom that can be seen on the weekly chart. A continued move to the upside would confirm a breakout of the neckline, thereby leaving the longer term target for oil futures near the $72/barrel level.
Over the near term, however, given the extent of the recent gains and resulting overbought condition, a period of correction or least consolidation could develop over the near term.
On a move to the downside, first support is at the midpoint of today’s price range, near $50/barrel, followed by the November 22nd high at $49.20. Holding this former high would keep oil futures well-positioned to resume the move higher and confirm the head and shoulders bottom.
During yesterday’s move to the upside, open interest rose 2.7%, signaling the advance was driven by new money entering the market, rather than short-covering, a constructive sign for the bullish case that suggests any near term setback should prove temporary.
Baker Hughes rig count data will be released tomorrow at 1pm ET.