Prices supported by tighter supply outlook
Crude Oil, Coal, China, Energy – Talking Points
- Crude Oil hits highest since October 2014 as supply outlook tightens
- Inventory data is the key to price direction as traders look at API, EIA data
- Floods in China Strangle Coal Supply Prospects, Pushing Prices Up
Oil prices rallied in the Asia-Pacific trading session before gains eased later in the day. The bullish action came despite a decline in equity market risk-taking on Wall Street. Crude oil is at its highest level since October 2014. Energy traders are also making offers to energy-related investment firms on positive profitability forecasts. A closely watched spread between December 2021/2022 crude contracts has widened recently, indicating a tighter supply outlook among traders (see chart below).
The energy crisis in Asia, Europe and, to a lesser extent, the United States helped fuel the price increase. A dramatic rise in natural gas prices has the potential to turn oil into an alternative combustion source for power plants, particularly throughout Asia. Natural gas prices are up more than 100% in the United States and almost 300% in Europe. That, combined with last week’s OPEC + decision to only increase production by an additional 400,000 barrels per day, is helping to push crude and Brent benchmarks higher.
Traders will be focusing on inventory data in the coming days. The American Petroleum Institute (API) will release data on US inventories on Tuesday. Data from the Energy Information Administration (EIA) will follow on Wednesday. EIA data generally attracts more market attention. The last two weekly reports have shown inventory build-up, which is generally bearish for prices. However, it appears traders are anticipating increased pressure on the demand side in the coming months.
Retrocession of crude oil (difference between the contractual prices of December 2021/2022)
Chart created with TradingView
Coal prices are also increasing. Flooding in China’s Shanxi Province has forced coal mining operations to stop. It comes after Beijing ordered power plants to temporarily increase production and customer tariffs to help ease the energy crisis plaguing the country. The local government has ordered dozens of coal mines to evacuate their workers. The floods come perhaps at one of the worst possible times for Asia, and they have the potential to keep some mines closed for weeks.
Crude Oil Technical Forecasts
Crude oil prices hold steady after a strong overnight performance that saw a breach above the psychologically towering 80 grip. After three consecutive daily gains, prices may take a break here. Bulls will look to stay above 80 before pushing higher. A break below this level would highlight the old 2021 high at 76.98. The RSI is down after breaking above the overbought level of 70.
Daily crude oil chart
Chart created with TradingView
— Written by Thomas Westwater, Analyst for DailyFX.com
Contact Thomas, use the comments section below or @FxWestwateron Twitter