Price curve? Check. Technical markers? Check. The oil market just got bullish and that’s left OPEC with little room for maneuver when it meets in Vienna next week.

After the energy ministers of Saudi Arabia and Russia talked up the potential for the Organization of Petroleum Exporting Countries and other nations to extend output cuts into early 2018, the crude market took off. OPEC’s preferred market structure returned, with nearer contracts at a premium further along the curve, with Brent and West Texas Intermediate crude rising above their key 200-day moving averages in intraday trading.

“Now they have to deliver,” said Ole Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen. “You could argue that an awful lot of positive news has been priced in and they need to deliver for that to be sustainable.”

A coalition of OPEC nations and allies including Russia last year agreed to cut output by about 1.8 million barrels a day, starting in January. After the move initially boosted prices, concerns that it wouldn’t be sufficient to counter-act surging U.S. production pushed WTI below $44 a barrel. Producer nations, acknowledging they won’t achieve their target of returning global inventories to their five-year average by the time the original deal expires at the end of June, look likely to agree an extension at a meeting in Vienna on May 25.

As traders in Europe hit their desks on Monday morning, Brent crude jumped above its 200-day moving average. Early in May, a break below that marker sparked a sell-off with prices at their lowest since the last OPEC meeting at the end of November. The global benchmark also broke on Monday above another key technical marker, the 50-day moving average, for the first time since April 19.

“If you were short you cover, if you were flat you start acquiring length and if you were long you add to or keep those positions,” said Tamas Varga, an analyst at brokerage PVM Oil Associates Ltd. in London. “If there’s going to be a rollover longer than the second half of this year, I think the market will strengthen even after the meeting.”

David Fuller's view

Interestingly, the press has been full of stories about how large long-term holders of the big multinational oil companies have been selling these top income producers since the beginning of 2017.  They were eventually joined by short sellers, forcing Brent Crude prices sharply lower in the second half of April. 

As an older investor, I accumulated a significant long position in Royal Dutch Shell B (monthly & weekly) over the last decade or so, mainly for income.  High yielders are seldom strong performers, so I bought mostly following setbacks, often reinvesting dividends as part of that strategy.  However, despite RDSB’s current yield of 6.7% and its extensive diversification, not least into natural gas following its purchase of BG Group last year, the long-term risks for fossil fuel producers can only increase, in my opinion. 

Over the last year, I have felt that my best opportunity to exit RDSB would be during the promotional hype prior to next year’s partial float of Saudi Aramco.  This state-controlled firm may be the world’s biggest oil producer but it can only be rationalised as attractive, in my opinion, if crude oil is trading higher than most people currently expect.  That would be somewhere above $60.  If so, I will be tempted to ease out of my RDSB on temporarily firmer oil prices.  

(See also these two articles: Fears over Aramco IPO justified: government to control wells, from Your Oil and Gas News – plus: Saudi Aramco takes tentative steps on IPO disclosure path, from The National Business)