Crude oil prices reached their highest point in over seven months on Monday, putting an end to a two-week period of declines. This strong rebound was driven by mounting concerns regarding the tightening global supply conditions. Recent optimism in the oil market has been fuelled by expectations that major oil-producing nations will continue to maintain strict production limits. The growing expectations that the Federal Reserve will leave interest rates unchanged in September has also supported crude prices.

It is widely anticipated that Saudi Arabia will extend its voluntary reduction of oil production by 1 million barrels per day into the month of October. This extension is likely to trigger further rise in oil prices and is part of the coordinated supply restrictions led by the Organization of the Petroleum Exporting Countries (OPEC) and their allies, collectively known as OPEC+.

In the United States, the demand for oil remains robust, as evidenced by a consistent decline in commercial crude oil inventories over five of the last six weeks, according to data from the U.S. Energy Information Administration. Recent activity in the options markets has seen a surge in bullish sentiment, with call options volumes on U.S. oil futures reaching their highest levels since May.

The primary driving forces behind the latest movement in crude oil prices are the anticipated additional production cuts from major oil-producing nations, particularly Russia and Saudi Arabia. Saudi Arabia is expected to continue its voluntary 1 million barrel per day (bpd) production cut into October, while Russia has already implemented a reduction of 300,000 bpd in September, following a 500,000 bpd cut in August. Traders are now eagerly awaiting an official announcement detailing the planned production cuts this week.

Additionally, crude oil prices have found support in growing expectations that the U.S. Federal Reserve may be nearing the conclusion of its interest rate hiking campaign, and indications that China’s efforts to stimulate economic growth may be gaining traction.

In China, the unexpected expansion of manufacturing activity in August, has alleviated some concerns about the economic health of the world’s largest oil importer. China’s economy had been weighed down by challenges in its property sector since emerging from the COVID-19 pandemic. Investors have responded positively to recent economic support measures in Beijing, such as deposit rate reductions at major state-owned banks and eased rules for homebuyers.

Source: TradingView

Last week’s price action decisively broke above key resistance of $83.53 confirming that the bear trend from the March 2022 high is complete and that higher price levels are likely to unfold in the coming months. The potential upside price target based on the breakout is in the range between $90.00 and $93.00. The persistent growth in U.S. oil production may act as a limiting factor on further substantial price gains over the medium-term. In the very short-term a minor pull back to unwind the overbought momentum conditions could be seen, however a resumption of the rally is anticipated thereafter.