New Lockdowns In Asia Spark Oil Demand Concerns

The week got off to a promising start with prices hitting their highest level since March 18 after Libya declared force majeure on exports from the port of Hariga and said it could extend the measure to other facilities, citing a budget dispute. But things went downhill from there on fears that India, the world’s third-biggest oil importer, may impose restrictions as coronavirus infections and deaths surged to record highs.

These new concerns over demand essentially became the theme of the week as a series of bearish developments outweighed few potentially bullish developments.

Bearish Factors

India Records World’s Highest Daily Covid Total

India, the world’s third-largest oil user, on Thursday reported the world’s highest daily increase to date with 314,835 new coronavirus cases.

Indian Oil Corp Ltd’s refineries are operating at about 95% of their capacity, down from 100% at the same time last month, two sources familiar with the matter told Reuters.

Japan Announces Third Wave of Lockdowns

Japan, the world’s No. 4 oil importer, is expected to announce a third wave of lockdowns affecting Tokyo and three western prefectures, media reported.

The Japanese government plans to declare a state of emergency for the third time for Tokyo and three other prefectures following a resurgence of new COVID-19 infections, Prime Minister Yoshihide Suga said on Thursday.

Iran and World Powers Make Headway in Negotiations

Progress on talks between Iran and world powers to resurrect the 2015 nuclear accord is also putting some pressure on prices. Analysts estimate that Iran has the potential to provide about 1-2 million barrels per day (bpd) in additional oil supply if a deal is struck.

US Crude and Gasoline Stocks Edge Up, Distillates Draw Down

U.S. crude oil stockpiles unexpectedly edged higher last week, while distillate inventories fell and gasoline stocks built modestly as refining rates held steady, the Energy Information Administration said on Wednesday.

Crude inventories rose by 594,000 barrels in the week to April 16 to 493 million barrels, compared with analysts’ expectations in a Reuters poll for a 3 million-barrel drop. East Coast inventories, however, fell to a record low at 7.9 million barrels.

U.S. gasoline stocks rose by 86,000 barrels in the week to 235 million barrels, the EIA said, compared with analysts’ expectations for a 464,000 million-barrel rise.

Distillate stockpiles, which include diesel and heating oil, fell by 1.1 million barrels to 142.4 million barrels, versus expectations for a 956,000-barrel drop, the EIA data showed.

US, Other Countries Deepen Climate Goals

Longer-term bearish factors are also starting to creep into the market as oil demand is expected to take a hit as more countries adopt policies to combat climate change.

According to Reuters, the United States and other countries hiked their targets for slashing greenhouse gas emissions at a global climate summit hosted by President Joe Biden, an event meant to resurrect U.S. leadership in the fight against global warming.

Biden unveiled the goal to cut emissions by 50%-52% from 2005 levels. Japan nearly doubled its target for cutting carbon emissions to 46% by 2030.

Bullish Factors

Libya said its oil production fell to about 1 million barrels per day in recent days and could drop further due to budgetary issues.

Flash purchasing managers’ index numbers for April came in better than expected in the Euro Zone and supported the view that the region’s economic recovery is accelerating.

Weekly Technical Analysis

Weekly June WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. A trade through $67.29 will signal a resumption of the uptrend. A trade through $57.29 will change the main trend to down.

The minor trend is also up. A trade through $57.68 will change the minor trend to down. This will also shift the momentum.

Retracement Level Analysis

The short-term range is $67.29 to $57.29. The market is currently testing its retracement zone at $63.47 to $62.29.

The main range is $36.27 to $67.29. If the main trend changes to down then its 50% level at $51.78 will become the primary downside target.

The contract range is $29.09 to $67.29. Its retracement zone at $48.19 to $43.68 is major support. This zone is controlling the longer-term direction of the market.

Weekly Technical Forecast

The direction of the June WTI crude oil market the week-ending April 30 will be determined by trader reaction to the short-term retracement zone at $62.29 to $63.47.

Bullish Scenario

A sustained move over $63.47 will indicate the presence of buyers. If this move is able to generate enough upside momentum then look for a retest of the main top at $67.29.

Bearish Scenario

A sustained move under $62.29 will signal the presence of sellers. If this creates enough downside momentum then look for the selling to possibly extend into $57.68 to $57.29.

If the main bottom at $57.29 fails as support then look out to the downside with $51.78 the next potential downside target.

Short-Term Outlook

Technically, this week’s price action proved the importance of the retracement zone at $62.29 to $63.47. The influence of this area will carry over to this week. Trader reaction to the short-term zone will once again set the tone of the market.

Fundamentally, there is not likely to be a quick solution to the COVID-19 problems in India so we will continue to expect to see increasing worries over the global demand recovery. At best, this news should cap gains. At worst, we could see a retest of $57.29.

The drop in Libyan production could provide some support, but at best we expect it to just slow down the selling pressure.

Don’t forget about OPEC+. The group plans to bring back about 2 million bpd of production over the next three months. OPEC+ members are due to meet next week but major changes to production policy are unlikely, Russia’s deputy prime minister and OPEC+ sources said.

Finally, the wildcard is Iran, in my opinion. No one is certain if and when a new deal will be struck, but if it means more oil supply, the news should hit prices hard.