by Andrew Huck, Schwab Center for Financial Research
Oil prices continue to march higher as markets consider tightening supplies as global economies recover from the pandemic. Prices of oil have rallied to multi year highs and have closed higher for 3 consecutive weeks, a disappointing US payroll report released last Friday was not even enough to deter bulls.
Last Friday the government released US non-farm payrolls, the report indicated 194,000 jobs were added in September, a pullback from a 366,000 increase in August, and disappointing analysts’ expectations of 500,000 additional jobs. Undeterred by the anemic jobs report oil futures for November expiration (CLX21) closed last Friday at the highest level of the week at $79.35 up 1.3% on the day.
This week oil continues its rally prices breached the $80 mark trading as high as $82.18 Monday, levels not seen since 2014.
Widespread energy shortages in Asia and Europe help to keep a bid under prices. Flooding in coal a producing region in China has resulting in coal mine closures sending coal prices higher. Utilities therefore need to look to alternative fuels like oil to run their operations.
Natural gas prices have also surged in Asia and Europe as those regions face shortages due to lack of supply and increasing demand as the recovery form the pandemic continues, as winter months approach and demand for heating fuel will be at its highest.
OPEC+ has committed to keeping supply constant in face of increasing demand, a factor in favor of the bull camp. OPEC+ agreed to boost total output to 400,000 bpd starting in July and has remined committed to this increase despite increasing demand. The Biden administration has even called for OPEC+ to do more to meet the increasing demand, but so far OPEC+ has not responded.
Looking at domestic production, the number of oil and gas rigs increased for the fifth week in a row, according to data made available from Baker-Hughes. Oil trading at multi year highs is spurring producers to add more rigs to production to take advantage of higher prices. The total number of oil rigs in production currently stands at 433, 5 more than the previous week. Total rigs in production including natural gas rigs stands at 533 an increase of 264 more from this time last year.
Looking at Light Sweet Crude Oil for November (CLX21) we can see prices have steadily increased since the breakout from the $72.75 mark near the end of September. Since then, prices have rallied $9.43 to an intraday high of 82.18 on Monday, an increase of nearly 13% in 13 trading days.
Since the breakout, prices have traded in an upward channel with channel line support near the $76.00 mark, bolstered by the 20-day SMA just below at $75.29. The top end of the channel is near the $82.60 mark and may act as near-term resistance. If prices should break channel support a test of Septembers breakout level near $73 may be expected.
Currently prices are above the 20,50- and 200-day SMA’s, and the 14 RSI is indicating strong momentum of 73. Some traders may consider this an overbought indication, however that does not necessarily mean a pull back or a trend reversal is in order, only that one may consider the momentum unusually strong.
20-Day SMA 75.29
50-Day SMA 50.00
200-Day SMA 63.59
14-Day RSI 73