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April 15, 2016, 3:17 a.m. EDT

Oil's bullish technicals belie dim prospects for OPEC freeze

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By Mike Paulenoff

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The 2016 financial markets have been dominated by — and fixated on — central-bank intentions and decisions on the one hand, and by the direction of oil prices on the other. With the approach of the OPEC Meeting in Doha, Qatar, on April 17, the attention of traders and investors will be focused on the outcome of the forthcoming gathering that has been billed as the “Production Freeze Meeting.” But rising prices and promising technical picture raise questions about exactly what impact the meeting will have on the price of oil itself. Let’s examine both sides.

OPEC meeting

At the outset of the meeting, here are some important bullet points:

  • OPEC rarely, if ever, agrees on anything, much less a decision to freeze or cut output, especially in these current challenging economic times

  • Heading into the meeting, OPEC output is near record highs at 32.5 million barrels per day

  • Russian crude-oil output is at record highs near 11 million barrels per day

  • Saudi Arabian oil output is near record highs at 10.2 million barrels per day

  • Iranian oil production is gearing up after the nuclear deal, with Iran pumping 3.2 million barrels per day into the market that was not there just a few months ago

  • Saudi Arabia has commented that it will not agree to a production freeze if Iran does not cut back, too. The Iranians so far refuse to comply.

  • U.S. oil production peaked at 9.7 million barrels per day in April 2015, but has declined to only about 9 million barrels per day during the past 11 months ... so far

  • The U.S. oil-rig count has declined from its peak of 1609 in Oct. 2014 to 354 rigs as of April, 08, 2016, the lowest level since 2009.

On the surface, it would appear that the 20-month plunge in oil prices is beginning to have a negative impact on U.S. production, but much less so on OPEC and Russian output, so far. Lots of things will have to fall into place in Doha for the major players to agree merely to a freeze of current, near-historic output levels, rather than a more intuitive and consequential output cut.

Technical picture

That said, however, there is a fascinating disconnect between the anticipation of another failed OPEC agreement on one hand, and my promising, extremely bullish technical set up for higher oil prices on the other. At the bottom of this column, I have linked to a near-term point-and-figure chart, a daily bar chart and a weekly bar chart of WTI NYMEX Nearby Crude Oil that all indicate to varying degrees that:

  1. Oil put in a significant bear phase low at $26.05 in February 2016

  2. That the February-March advance from $26.05 to $41.90 represented the first up leg in a larger, incomplete intermediate-term recovery-rally period

  3. That the minimum upside target for the next leg of the recovery is $45.00, while the maximum upside target is $61.00

  4. That weakness in reaction to a disappointing Doha Meeting will provide a buying opportunity within the incomplete larger recovery-rally phase

  5. That the positive and promising technical setup is warning us that the underlying fundamental relationships and/or the oil geopolitical landscape are shifting in favor of upward pressure on prices in the weeks and months ahead

During the past two weeks, the February-March up move from $26.05 to $41.90 had multiple opportunities for a major reversal, but instead, nearby oil is perched just shy of $40.00, buoyed either by shifting underlying conditions, or anticipation of a surprising output agreement by OPEC and non-OPEC members.

The oil market's technical set up appears to be telling us — warning us — that something positive is evolving that we should not ignore, but rather, should be embraced in the days and weeks directly ahead. We have been involved in, and continue to participate in the long side of WTI via the United States Oil Fund /zigman2/quotes/203483736/composite USO +1.39% , USO Calls, and various individual energy equities posted to our MPTrader.com Model Trading Portfolio.

See Mike's technical charts on oil.

Disclosure: Paulenoff is long USO.

US : U.S.: NYSE Arca
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