Oil keeps a tad higher on output cuts deal, what's next?

Technical Analysis

Author: Justin Low | oil

Oil is up by over 4% to just under $24 currently

Oil H1 13-04 
The price action isn't as encouraging as oil opened with a gap higher before erasing all of its gains and then only gradually moving back higher over the past few hours.

Currently, price is still sitting under its 200-hour MA (blue line) so that suggests the near-term bias is still more bearish with the 50.0 retracement level @ $24.20 also capping gains.

The key focus in the market right now is 'what have we learned' from the historic oil output cuts deal between OPEC+ and other international producers? Let's try to take a look.

The deal is more than what is made out to be
Let's face it, this isn't really such a remarkable deal that the total 9.7 mil bpd suggests.

The bulk of the output cuts are coming from Saudi Arabia and Russia, with the baseline being from a rather inflated level considering that the Saudis are cutting from ~12 mil bpd.

The end result of 8.5 mil bpd is only just a 1.2 mil bpd cut compared to its February production when the kingdom was still adhering to the previous OPEC+ pact.

Meanwhile, Russia may be promising to deliver more output cuts but their reputation under the previous OPEC+ pact is hardly stellar as they displayed very poor compliance.

Just not good enough
Despite there being over 23 countries involved in this historic deal, the collective 9.7 mil bpd worth of output cuts agreed isn't going to cut it.

The supply glut in the market is easily double that amount right now considering the global lockdown measures which has resulted in loss in oil demand over the past few weeks.

Any boost in oil prices require coronavirus developments to turn for the better and for countries to get their economies back up and running again.

Otherwise, all this does is slow the bleeding and not stop it.

What happens next?
Although the cuts agreed isn't the perfect solution, it is at least some form of reprieve.

Historically, oil prices at around $20 per barrel is extremely cheap but the current situation in the market and across the world is rather unprecedented.

The best-case scenario is that the output cuts help to set a bit of a floor around $20 but it is no reason for oil to rally back above $30 considering the coronavirus situation globally.

As such, oil could see some fluctuation around $20-30 in the meantime as the focus now shifts to coronavirus developments instead. Besides that, monitoring and compliance of the latest deal will also be something to watch out for in the coming months.

But if the global situation continues to suffer to such a degree for an extended period (Q3 or even Q4), expect the pressure on oil prices to continue as stockpiles mount and that could see the $20 level breached in due time.

In short, this deal is no reason for oil to keep a sustained rally back above $30 but it could be enough to stem off a break below $20 for now at least.

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