Bullish Fundamentals Intact Despite Trade War Worries

U.S. West Texas Intermediate and international benchmark Brent crude oil futures are trading slightly lower for the week with most of the downside pressure being fueled by escalating tensions between the United States and China over the trade dispute. The price action is being driven by the headlines, which started the week bearish after President Trump promised new tariffs on Chinese imports on Friday.

Crude oil prices traded sideways-to-lower throughout the week as investors shed risky assets while moving money into the safe-haven Japanese Yen and U.S. Treasurys. Demand for risk returned on Thursday after Trump said there was still the possibility of a trade deal being reached, but the "risk-on" scenario disappeared and crude oil prices retreated on Friday after Trump said there's "absolutely no need to rush" on a trade agreement with China and tariffs will make the United States "much stronger."

The main concern weighing on crude oil at the end of the week is whether an escalating trade dispute will lead to a U.S. recession, which would hurt U.S. demand for crude oil.

Bullish Factors Remain Intact

Crude oil futures continue to be underpinned primarily by the OPEC-led production cuts and the U.S. sanctions against Venezuela and Iran. This news is providing steady support because it is helping to keep global supply tight.

Giving prices a further boost this week was an unexpected drop in U.S. crude inventories. U.S. crude oil stocks fell by 4 million barrels in the week ended May 3, according to the Energy Information Administration. Traders were looking for a 1.1 million barrel build.

The EIA also reported an estimated fall of 600,000 barrels in gasoline inventories after a 900.000-barrel increase two weeks ago. Production in the week to May 3 averaged 10.1 million bpd, versus 9.9 million bpd in the previous week.

The EIA report also showed an inventory draw of 200,000 barrels in distillate fuel, which compared with a decline of 1.3 million barrels a week earlier. Distillate fuel production last week averaged 5.1 million bpd, largely unchanged on the prior week.

Switch from Economic Risk to Geopolitical Risk

Earlier in the week, President Trump said the U.S. will deploy four B-52 bombers to the Middle East in response to what the Trump administration said are threats of a possible attack by Iran on American troops in the region. This helped generate some speculative buying in crude oil

Weekly Fundamental Forecast

Crude oil price action remains subdued because of concerns a trade war could reduce demand. At the same time, rising tensions in the Middle East could have a negative impact on supply. These conflicting geopolitical events are causing the stalemate that is holding prices in a tight range.

Traders aren't too worried about the mainstays: the production cuts by OPEC and its allies and the sanctions against Iran and Venezuela. Although the OPEC cuts will become an issue in late June when the cartel and its allies meet to decide whether to continue the program.

The current price action suggests a major move is coming, but it's not likely to happen until there is major breaking news regarding U.S. -China trade relations. At this point, it appears traders aren't going to make a move until they know definitively if trade deal negotiations are on or off.

Weekly Technical Analysis

June West Texas Intermediate Crude Oil

The main trend is up according to the weekly swing chart, however, momentum has been trending lower since the closing price reversal top formed at $66.60 during the week ending April 26.

A trade through $66.60 will negate the potentially bearish closing price reversal top and signal a resumption of the uptrend. The main trend will officially change to down on a move through the $55.31 main bottom.

The main range is $75.65 to $43.80. The market is currently trading inside its 50% to 61.8% retracement zone at $59.73 to $63.48. This zone is controlling the longer-term direction of the market.

The short-term range is $43.80 to $66.60. If the current pressure creates enough downside momentum, then look for the selling to extend into its retracement zone at $55.20 to $52.51.

Weekly Technical Forecast

Based on this week's price action, the direction of the June West Texas Intermediate crude oil market during the week ending May 17 will be determined by trader reaction to a pair of Gann angles at $60.31 and $59.65.

Bullish Scenario

Since the main trend is up, a sustained move over $60.31 will indicate the presence of buyers. If this creates enough upside momentum then look for buyers to extend the rally into the major Fibonacci level at $63.48. Overcoming this level will put the market in a bullish position with $66.60 the next major upside target.

Bearish Scenario

A sustained move under $59.65 will signal the presence of aggressive counter-trend sellers. This could trigger an acceleration to the downside since the weekly chart indicates there isn't any important support until $55.31.

The market isn't likely to drop straight through to $55.31, but steady selling pressure is likely to drive the market into this price over the near-term and into perhaps late June.