Oil fell symbolically over the past week, losing 1.3% to $116.3 a barrel of WTI amid trading in Europe on Monday.
Locally oil looks like a solid defensive asset, with oil companies such as Exxon Mobil renewing record highs, attracting investor capital. While geopolitics and strong demand are behind the sector’s growth, the risks may outweigh the upside potential at current levels.
Technically, oil remains within the upward trend formed late last year. Intra-week price dips under this line have been instead actively bought out.
At the same time, on the weekly charts, WTI oil formed a double top, failing to close the week above $120. The red line for oil could be to consolidate below $110 at the end of this or next week.
On the same weekly timeframes that best fit commodity markets, the WTI has stalled at the overbought area of the RSI index. In the previous year and a half, we had a similar situation four times, all ending in a corrective pullback.
Among the fundamental factors is the increase in the number of working oil rigs in the USA last week to 733 in total, of which 580 were producing oil. Separately, US Treasury Secretary Yellen said late last week that production in the country is picking up, which we have yet to see in the reports.
OPEC countries have also been increasing their production capacity, raising the quota target by 648K BPD in the last two months, instead of the previous step of 400K and later 432K BPD per month. So far, the cartel has not scooped up quotas, but high oil prices and a sustained rise in the cap will attract new investment, as it did in the last decade, which has caused oil prices to fall chronically.
There is also downward pressure on the bears’ side in the equity market. So far, oil has ignored the flight from risky assets, but history teaches us that such periods do not last, and oil could start catching up with the rest of the market very soon.