WTI eyes a break above key resistance just ahead of the $54.00 level

Various bullish fundamental catalysts have put crude oil markets on the front foot on Monday and front-month futures contracts for West Texas Intermediary (WTI), the American benchmark for sweet light crude oil, has come within a whisker of recent highs set earlier on in the month of just below the $54.00 level. WTI has so far topped out at $53.71 on Monday, with the bulls targeting a break above 14 and 20 January highs at $53.81 and the 13 January (and 2021) high at $53.90 so that the bullish trend that dominated throughout Q4 and early January can reassert itself.

A break above these levels and the psychological $54.00 mark would open the door for a test of the February 2020 high at $54.4. Beyond that, its clear air (technically speaking) until the January 2020 highs of just to the north of the $65.00 level. Long-term crude oil market bulls who are looking for a rapid economic recovery later in the year to result in a rapid rebound in economic growth and crude oil demand will undoubtedly be targeting this level.

Bad weather, drawdowns, OPEC compliance

A number of factors are being cited as supportive for crude oil markets on Monday. Firstly, most analysts expect winter demand to be higher than usual in the US amid one of the worst snowstorms to hit the North East region in years. Secondly, after last week’s 2.3M barrel drawdown in crude oil inventories at the Cushing, Oklahoma, delivery hub for crude oil futures, another 2.3M barrel draw is expected this week.  

Additionally, though OPEC oil output rose for a seventh consecutive month in January, reported Reuters citing a survey, the production increase was smaller than expected; the cartel pumped 25.75M barrels of crude oil per day in January, up 160K from December. As part of the OPEC+ agreement, OPEC was actually permitted to increase output by about 300K barrels per day, so this 160K increase was less than anticipated. Phil Flynn, an analyst at Price Futures Group in Chicago commented that “it looks like OPEC compliance is really pushing the complex higher, as well as the expectation that we will see U.S. inventories tighten over the next few weeks.”

Stimulus hopes

Elsewhere and also likely supporting the complex, the stimulus drum is rolling again in Washington DC; House Democrats have reportedly started to build a budget so that they can push through US President Joe Biden’s $1.9T “rescue” package through Congress via a process called “budget reconciliation”; this would bypass the requirement to get 10 Republican Senators on board by requiring just a simple majority (the 50 Democrat Senators plus Vice President Kamala Harris’ vote). However, any stimulus package passed via budget reconsolidation would likely have to remove provisions such as an increase to the national minimum wage of $15 per hour.

Meanwhile, the possibility of a negotiated stimulus package with the Republicans remains on the table; a group of 10 “moderate” Republicans made a $618B proposal which includes $1000 stimulus cheques to President Biden and they are slated to talk to him about the proposal today. $618B will be nowhere near enough for the Democrats, but it is a start. Be it more stimulus via budget reconciliation or more stimulus via a bipartisan deal, the stimulus drum is banging, and this ought to be good for any asset class that likes a higher US economic growth rate in 2021/2022 (such as oil, given the additional demand higher growth results in).

Key levels WTI