U.S. West Texas Intermediate and international-benchmark Brent crude oil futures surged to a new high for the year this week. The markets are being underpinned by the OPEC-led production cuts and the U.S. sanctions against Iran and Venezuela, which have helped tighten the global supply. However, Friday's spike to the upside is likely being fueled by increased demand for risky assets and firmer U.S. Treasury yields, which have dampened concerns over a U.S. recession later in the year. The catalyst behind the price action is the optimism created by the resumption of the trade negotiations between the United States and China.
Strong First Quarter Performance
Crude oil is set to post its biggest first quarter gain in 10-years. Additionally, WTI futures are in a position to rise for a fourth straight week and are set for a first quarter gain of 31 percent. Brent futures are set to post a gain of 27 percent for the first quarter.
CNBC says, "For both futures contracts, the first quarter 2019 is the best performing quarter since the second quarter of 2009 when both gained about 40 percent."
Trump Makes Feeble Attempt to Stop Rally
The strong gains this quarter may have prompted President Trump to call for OPEC to boost production to lower prices on Thursday.
"Very important that OPEC increase the flow of Oil. World Markets are fragile, price of Oil getting too high. Thank you!" Trump wrote in a post on Twitter.
Trump made a similar request last month that was largely ignored by OPEC's defacto leader Saudi Arabia. Looking ahead, the Saudi's favor cuts for the full year, but the Russians want them to end in September. OPEC and its allies are scheduled to meet in June to discuss whether to continue with its production cuts.
Trump also seems to have conveniently forgotten that the U.S. sanctions against Iran and Venezuela have contributed to the reduction in supply and the first quarter price rise.
Stock Market Correlation
The recent price action indicates that demand concerns are helping to slow down the rally at times, but not enough to derail the strong uptrend. Furthermore, crude oil has been moving nearly lock-step with the stock market, leading some traders to believe that the biggest drag on crude oil prices is likely to be driven by renewed stock market weakness.
Energy Information Administration
Last Wednesday, the U.S. Energy Information Administration (EIA) reported a moderate build in U.S. crude oil inventories for the week to March 22. This came as a surprise because investors were hoping for a 1.1 million dollar drawdown.
Additionally, gasoline production averaged 9.7 million bpd last week, from 9.9 million bpd in the week before. Gasoline inventories fell by 2.9 million barrels, after a draw of 4.6 million barrels in the previous week. Furthermore, distillate fuel production averaged 4.9 million bpd last week, virtually unchanged on the week. Distillate fuel inventories fell by 2.1 million barrels.
Friday's surge to new highs indicates that the reaction to this report was just a minor glitch and not enough to derail the rally for a long-period of time.
Conclusion
The consistent backing and filling during the crude oil market rally is a strong indication that investors are coming in on the breaks. This is because the OPEC-led supply cuts are continuing to provide a reason to be long this market. Traders have been hesitant to buy strength or a breakout to the upside because of lingering uncertainties over demand.
This is a perfectly acceptable chart pattern because it suggests professionals are coming in on the weakness and riding the market higher. Speculators tend to buy strength aggressively. As long as the professional money managers are consistent, the rally should continue over the near-term.
Technical Analysis
Weekly May West Texas Intermediate Crude Oil Technical Analysis
The main trend is up according to the weekly swing chart. The uptrend was reaffirmed this week when buyers took out last week's high at $60.39. The weekly chart indicates the market has room to run before it hits actual resistance. The uptrend appears to be safe at this time. A trade through $54.87 will change the main trend to down.
The market is also following a short-term uptrending angle. This potential support level moves up to $58.87 this week. Look for a bullish tone as long as this price holds as support. An even more important support angle moves up to $57.46 this week. This angle has been guiding the market higher since the week-ending December 28, 2018. Breaking this long-term angle will be the first major sign of weakness in over three months.
The main range is $75.80 to $43.46. Its 50% to 61.8% retracement zone at $59.63 to $63.45 is the primary upside target. WTI crude oil is currently trading inside this zone. This makes $59.63 support.
A sustained move over $59.63 will indicate the buying is getting stronger. If this creates enough upside momentum then look for the rally to possibly extend into a downtrending angle at $62.80 and a Fibonacci level at $63.45.
Technical Forecast
The direction of the May WTI crude oil market this week is likely to be determined by trader reaction to the 50% level at $59.63. A sustained move over this level will indicate the buying is getting stronger with a potential target $62.80 to $63.45. If $59.63 fails as support then look for prices to retreat into a pair of support angles at $58.87 and $57.46.
Fundamental and technical analyst with 30 years experience. More