Oil Price Defends August Low Even as OPEC Retains Production Schedule

Oil Price Talking Points

The price of oil slipped to a fresh weekly low ($62.43) as the Organization of Petroleum Exporting Countries (OPEC) stay on track to boost production in 2022, but lack of momentum to test the August low ($61.74) may generate a textbook buy signal in the Relative Strength Index (RSI) as the oscillator recovers from oversold territory.

Oil Price Defends August Low Even as OPEC Retains Production Schedule

The price of oil trades below the 200-Day SMA ($69.85) for the first time in 2021 amid concerns surrounding the Omicron variant, and crude may face headwinds over the remainder of the year as OPEC and its allies plan to “adjust upward the monthly overall production by 0.4 mb/d for the month of January 2022.”

The decision suggests OPEC+ is undeterred by the new COVID-19 strain as they stay on track to gradually restore crude output to pre-pandemic levels, and it remains to be seen if the group will retain the current production schedule throughout the first half of 2022 as the producers pledge to “make immediate adjustments if required.

As a result, developments coming out of the US may influence the price of oil ahead of the next OPEC and non-OPEC Ministerial Meeting on January 4 as President Joe Biden plans to work with China ‘to address global energy supplies.

Image of DailyFX Economic Calendar for US

Recent data prints coming out of the US points to slowing demand as stockpiles narrowed 0.91M in the week ending November 26 versus forecasts for a 1.237M decline, and the threat of renewed COVID-19 restrictions may produce headwinds for crude especially as US production increases for the third consecutive week.

Image of EIA Weekly US Field Production of Crude Oil

A deeper look at the figure from the Energy Information Administration (EIA) showed weekly US field production rising to 11,600K from 11,500 in the week ending November 19, and signs of easing demand along with the gradual rise in supply may lead to potential shift in the broader trend as the price of oil appears to have reversed course following the failed attempts to clear the October high ($85.41).

With that said, the growing response to the Omicron variant may keep the price of oil under pressure as countries across the globe reinstate travel restrictions, but lack of momentum to test the August low ($61.74) may generate a near-term rebound in crude as the Relative Strength Index (RSI) is on the cusp of crossing back above 30 to indicate a textbook buy signal.

Oil Price Daily Chart

Image of Oil price daily chart

Source: Trading View

  • Keep in mind, the price of oil cleared the July high ($76.98) after defending the May low ($61.56), with crude trading to a fresh yearly high ($85.41) in October, which pushed the Relative Strength Index (RSI) above 70 for the first time since July.
  • However, the price of oil reversed ahead of the October 2014 high ($92.96) as the RSI fell back from overbought territory, with crude now trading below the 200-Day SMA ($69.85) for the first time in 2021.
  • Failure to defend the November low ($64.43) pushed the price of oil briefly below the $62.70 (61.8% retracement) to $62.90 (78.6% expansion) region, but lack of momentum to test the August low ($61.74) may generate a near-term rebound in crude as the RSI bounces back from oversold territory.
  • Need a close above the $65.40 (23.6% expansion) to $66.50 (23.6% expansion) region to bring the $69.40 (38.2% expansion) area on the radar, with a move above the 200-Day SMA ($69.85) opening up the Fibonacci overlap around $70.40 (38.2% expansion) to $71.70 (5% expansion).
  • At the same time, a close below the $65.40 (23.6% expansion) to $66.50 (23.6% expansion) region may push the price of oil back towards the $62.70 (61.8% retracement) to $62.90 (78.6% expansion) region, with a break of the November low ($64.43) bringing the $60.30 (38.2% retracement) area on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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