Time To Sell Oil After Rally?

WTI Crude Oil has rallied 11.36 percent since reaching a bottom of 42.53 on June 21. It has had a particularly good run this week as US inventories declined by 4.7 million barrels in the week ending July 14, which was more than the expected decrease of 3.2 million barrels.

Though WTI oil is starting to face some technical pressure as the daily Stochastic Oscillator has reached 81.58, signalling overbought conditions.

Oil prices appear to be stuck in the $40 to $50 range, because oil at $50 is profitable for US producers. So every time oil rises closer towards that price level, US shale production rises, which is hindering the upward price momentum.

Adding to that, the report from the International Energy Agency last week showed that oil supply rose by 720,000 barrels per day in June, as co-operation amongst OPEC members to cut oil production by 1.8 million barrels per day between January 2017 and March 2018, is turning sour.

Moreover, strengthened co-operation at next Monday’s OPEC meeting seems unlikely given that Nigeria and Libya continue to demand exemption from the production cut due to domestic political instability.

Hence this week may be a good time to book any profits in long oil trades, as both technical and fundamental factors are not supportive of further price gains in the short- term.

Nevertheless, if oil falls back closer to the $40 level, entering into a long trade again may be a good play as WTI crude continues to hover between $40 and $50. In fact, geopolitical factors are also building up such as potential US sanctions on Venezuela or rising tensions in North Africa and the Middle East, which could help support prices as well in the short- term.

Other fundamental factors may also be supportive for oil in the long- term. For example, the lack of investments in oil exploration due to the recent slump in prices could restrain supply over the longer- term going forward. Additionally economic conditions are starting to look much better as both the Federal Reserve and ECB are turning more hawkish with improving economic data coming in, leading to increased demand for oil.

Therefore, whilst it may be a good idea to sell oil on the recent rally, long- term bulls should certainly pick it up again when oil returns to the lower $40s range.