Brent Oil Forecast: Eyes $62.00 by year-end as OPEC signals confidence in recovery

Oil prices are well bid as OPEC and Russia said they were about halfway toward clearing a global oil glut and warned against complacency as rebalancing gathers pace.

At the time of writing, Brent oil was trading 0.66% or 37 cents higher on the day at $56.40/barrel, its highest level since April.

Key takeaways from OPEC meeting

• The meeting concluded without any recommendation to extend output cuts
• Implementation of the pledged 1.8 million barrels a day of production cuts remains high
• OPEC members, Russia and several other producers have cut production by about 1.8 million barrels per day (bpd) since January.
• OPEC believes oil demand is rising at a "high pace".
• Kuwait Minister said, "stock levels in industrialized OECD states in August that were 170 million barrels above the five-year average, down from 340 million barrels in January."

Material evidence that adds credence to OPEC's optimism

Brent oil in backwardation -  “There is no doubt that the oil market is moving in the right direction,” the Organization of the Petroleum Exporting Countries noted with satisfaction in its most recent bulletin published on Wednesday.

As per Platts report, "The Brent crude futures spread for December 2017/December 2018 traded on the Intercontinental Exchange flipped to backwardation last week for the first time in three months amid growing optimism that global oil market rebalancing will drive the price structure higher.".

Backwardation is an inverted market situation in commodities and foreign exchange trading, where the prices for deliveries in the near future (spot prices or front-month contracts] are higher than those for later deliveries.

It is caused by excess of demand over supply. The global oil output cut deal has curbed supply to an enough extent so as to push the market into backwardation.

OPEC's status quo adds credence to ongoing rebalancing 

OPEC's decision to maintain the status quo today will reinforce expectations that the oil market is rebalancing and that US shale is no longer a threat as it was widely believed to be earlier his year.

The trouble in the first half of this year was an irrational perception on trading floors that every barrel of output cut by OPEC was subsidizing Shale barrel. OPEC's decision to refrain from extending output cuts at today's meeting is likely to squash the irrational perception and keep oil prices well bid as we move into the fourth quarter.

Technicals - Bullish continuation pattern

Weekly chart

• The chart above shows an upside break of the symmetrical triangle, which is a continuation pattern, i.e. the rally from the January 2017 low of $27.08.
• The RSI is nicely positioned above 50.00 [bullish territory] and sloping upwards.
• The weekly 50-MA and weekly 100-MA have bottomed out.

View

• Brent oil is likely to test the weekly 200-MA, which is seen sloping downwards to $62.00 levels over the next three months or so.
• In the short-run, a minor pull back cannot be ruled out, especially if Brent fails to take out the January high of $58.50. However, the bullish-to-bearish change is seen only if prices drop below the trend line sloping upwards from the June low and July low.