The United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, notched a modest decline through the first trading week of 2017, but that should not be seen as a sign that oil lacks rally potential.
Oil prices are rebounding after Saudi Arabia and its allies in the Organization of Petroleum Exporting Countries, along with other non-OPEC producers, pledged to cut output to end the global glut that depressed crude prices for two years. Last year represented oil’s best annual performance since the global financial crisis.
OPEC plans to diminish output to a range of 32.5 to 33.0 million barrels per day from its current estimated output of 33.24 million barrels per day. While Saudi Arabia, OPEC’s biggest producer, has agreed to reduce output, Iran, Libya and Nigeria might not follow suit.
In fact, Nigeria, Africa’s largest oil producer, has said it plans to boost output. However, other non-OPEC countries are expected to follow the cartel in reducing production and that could trigger dwindling supplies next year.
“West Texas Intermediate oil, which fell Thursday after an unexpected increase in inventory, has rallied nearly 21 percent over the last two months, surging from $45 a barrel to $54 in the last few trading days of 2016. Ari Wald, head of technical analysis at Oppenheimer, has noted a multiyear bullish reversal in the charts that to Wald indicates moves closer to crude’s highs in June of 2015,” reports CNBC.
However, there are signs U.S. shale producers are prepared to ramp up production as highlighted by recent rig count data. About a dozen non-OPEC producers have also agreed to pare output.
OPEC has already agreed to reduce output by 1.2 million barrels per day. After the non-OPEC producers’ cuts, total reduction now represents almost 2% of global supply.
“Technically speaking, a bottoming formation means the asset has reached a low and could be in the beginning phases of heading higher. The bottom formation to which Wald refers formed around the $50 mark, which crude broke in early December — thus the formation’s completion,” according to CNBC.