Oil prices are approaching breakout levels

oil pump

From Tom DiChristopher:

  • Brent crude oil tops $65 a barrel for the first time this year, while U.S. crude rises towards a nearly three-month high above $55.50.
  • Analysts say both oil prices benchmarks are trading in a region that could portend a further rally.
  • Output cuts from OPEC and Saudi Arabia are helping crude futures overcome concern about potential demand destruction caused by global economic slowdown.

Analysts say oil prices are approaching breakout levels, and the final day of trading this week will offer clues about whether crude futures can keep rallying.

Brent crude on Friday topped $65 a barrel for the first time this year, hitting a nearly three-month high. The international benchmark for oil prices was pushing toward $66 around 9:45 a.m. ET.

Meanwhile, U.S. West Texas Intermediate crude popped above $55, and was threatening to take out last week’s 2½-month high at $55.75.

The main catalyst for the bullish run is a sharp pullback in OPEC’s output at the start of a six-month production-cutting deal, which was bolstered by top exporter Saudi Arabia’s pledge to pump well below its quota. This week, Saudi Energy Minister Khalid al-Falih said the kingdom plans to produce 9.8 million barrels a day in March, about half a million barrels below levels the Saudis agreed to and down from 11.1 million bpd in November.

That is finally helping oil prices push through resistance built on forecasts for slowing demand and concerns about a sluggish global economy as the U.S.-China trade dispute remains unresolved.

“Oil has previously struggled during previous periods of risk aversion but, like its fellow commodities, is fond of a weaker dollar and is continuing to respond to favourable reports this week,” Craig Erlam, senior market analyst at brokerage OANDA, wrote in a morning market briefing.

“Brent and WTI are both now seriously testing a major resistance zone, around $65 and $55, respectively, the break of which could be the catalyst for another rally.”

John Kilduff, founding partner at energy hedge fund Again Capital, sees Brent’s breakout levels closer to $66.25 and thinks WTI will snap resistance around $56. He is looking for Brent to close out the week above $65 and WTI to settle above $55.

“It would be an important close for the week above those key levels and just continue to solidify the gains that we’ve been installing,” he said.

The uptrend in the market is still “nascent,” says Kilduff, but WTI’s rise from a low of $51.23 on Monday to a high at $55.61 on Friday gives the sideways channel a more bullish tone. A bearish mood had prevailed after WTI took a run at $56 a barrel last week and then faltered through the start of this week, he said.

In addition to the deeper-than-expected Saudi production cuts, Kilduff says markets are getting a boost from threats of militant attacks on Nigeria’s oil infrastructure ahead of Saturday’s presidential elections, ongoing conflict over Libya’s biggest oil field, an outage at Saudi Arabia’s largest offshore field and new U.S. sanctions against Venezuela’s state-owned energy company.

“It’s been a pretty measured response to a lot of bullish news actually,” he said.

The United States Oil Fund LP (USO) was trading at $11.66 per share on Friday morning, up $0.18 (+1.57%). Year-to-date, USO has declined -2.91%, versus a 3.99% rise in the benchmark S&P 500 index during the same period.

USO currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 108 ETFs in the Commodity ETFs category.

This article is brought to you courtesy of CNBC.