Oil Price Rally Eyes March High as RSI Flirts with Overbought Zone

Oil Price Rally Eyes March High as RSI Flirts with Overbought Zone

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Oil Price Talking Points

Crude climbs to a fresh monthly high ($47.74) despite an unexpected increase in US inventories, and the price of oil may continue to retrace the decline resulting from the COVID-19 pandemic as tracks the upward trend established in November.

Oil Price Rally Eyes March High as RSI Flirts with Overbought Zone

The price of oil approaches the March high ($48.66) as the Organization of the Petroleum Exporting Countries (OPEC) reveal that “beginning in January 2021, DoC (Declaration of Cooperation) participating countries decided to voluntary adjust production by 0.5 mb/d from 7.7 mb/d to 7.2 mb/d” at its last meeting for 2020.

It seems as though OPEC and its allies will continue to regulate the energy market in the year ahead as the group “agreed to hold monthly OPEC and non-OPEC ministerial meetings starting January 2021 to assess market conditions and decide on further production adjustments for the following month,” and signs of subdued supply may keep crude prices afloat amid the tepid recovery in US production.

Image of EIA US field production of crude oil

Even though the latest figures from the Energy Information Energy (EIA) showed US crude inventories increasing 15.189M in the week ending December 4, field production held steady for the second consecutive week, with output sitting at 11,100K during the same period.

In turn, the price of oil appears to be on track to test the March high ($48.66) as US production remains at its lowest level since 2018, and the ongoing efforts by OPEC+ may continue to act as a backstop for crude as it preserves the upward trend established in November.

At the same time, the Relative Strength Index (RSI) highlights a similar dynamic as the oscillator breaks out of the downward trend carried over from June, and the indicator may continue to offer a bullish outlook if the oscillator pushes into overbought territory for the first time since 2019.

Oil Price Daily Chart

Image of oil price daily chart

Source: Trading View

  • Keep in mind, crude has broken out of the range bound price action carried over from the third quarter following the failed attempt to close below the Fibonacci overlap around $34.80 (61.8% expansion) to $35.90 (50% retracement), and the price of oil may continue to retrace the decline resulting from the COVID-19 pandemic as the break above the August high ($43.78) brings the March high ($48.66) on the radar
  • The Relative Strength Index (RSI) shows a similar dynamic as the oscillator breaks out of the downward trend from June and flirts with overbought territory, with a move above 70 likely to be accompanied by higher oil prices like the behavior last seen in 2019.
  • The lack of momentum to pushed below the $44.60 (61.8% expansion) to $45.10 (61.8% expansion) region has kept the upward trend from November intact, with the $49.20 (50% expansion) area still on the radar as it largely incorporates the March high ($48.66).
  • Next region of interest coming in around $52.90 (78.6% retracement) to $53.30 (38.2% expansion) followed by the February high ($53.66).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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