Oil near 2.5-year high, markets optimistic about reflation

• USOIL trading near $68.4

• OPEC + to increase output

• Iranian supplies not impacting markets yet

Bullish narrative supported by technical and fundamental indicators

Oil price, measured by USOIL, has reached a 2.5-year high of $68.4. After a disastrous 2020, oil investors have turned optimistic about reflation as major economies re-opened for the summer. Strong economic data and expectations for a rebound in demand seem to outweigh the risks posed by an increase in supply from Iran and the spread of new COVID-19 variants, particularly that in India. Technical indicators support a bullish trend with major resistance levels near $70 and $75.

Technicals signal weak bullish momentum

USOILs daily chart signals an upward trend for the upcoming weeks and months with momentum indicators stacked bullishly. After a period of consolidation throughout March of this year, oil price has been inching higher, occasionally testing 21-day and 34-day exponential moving average (EMA) support. After briefly breaking the 50-day simple moving average (SMA) support in late May, its price recovered to the 8-day EMA support level, gaining 7.1% since May 24th.

Pullback to $66 level likely

Oils price action seems to be extended with upper Bollinger Band resistance being tested. Also, price is at the upper end of its recent trading range with a stochastic oscillator currently near 90. RSI is still neutral and pointing higher, leaving room for another move one step higher. The momentum looks weak, however, based on an ADX of 16. Sideways movement or a pullback to 8- or 21-day EMA, near $65.7 to $66.7, seem likely.

Major resistance is near $70, which is a 1.24% Fibonacci extension level from swing highs and a psychologically important price point. Also, $75 has proven to be a long-term resistance, one that is likely to be tested in the coming weeks. $70 levels could be achieved by mid-June.

OPEC + sees global demand growing with stocks thinning

According to the OPEC + technical committee, fundamental data seem to support short-term upward momentum with global stocks thinning below the 2015-2019 average level. Demand is likely to jump by six million b/d in the second half of this year. As reported by WSJ, the OECD expects global output to increase by 5.8%, its strongest extension since 1973.. Furthermore, OPEC and its allies have responded to increased demand by extending output by 450,000 b/d, a decision that was initially announced in April and confirmed earlier this week . These changes come effective from next month onwards.

Iran exports subject to the outcome of the Vienna conference

OPEC + has not committed to any further output increases as the discussions between Iran and world powers in Vienna are ongoing and unlikely to conclude before Iran‘s elections on June 18th. Recent news about Iran’s uranium enrichment amidst the Vienna conference is likely to delay negotiations to revive a 2015 nuclear accord and postpone exports of Iranian oil. Iran has the potential to increase output from 2.4 to 4 million b/d, potentially putting pressure on the commoditys price. Notwithstanding, we are still weeks away from the agreement and the next steps to be taken by OPEC. Until then, expect a bullish narrative for oil and energy to remain intact.