U.S. West Texas Intermediate crude oil futures are in a position to close higher for a second consecutive week on Friday as more countries moved forward with plans to ease economic and social restrictions put in place to halt the coronavirus pandemic and as more output was reduced.
Nearby WTI crude oil and international-benchmark Brent crude oil are heading for the second week of gains after hitting what looks like a major low in April, when U.S. oil crashed below $0.00, with WTI up about 20% this week and Brent advancing close to 12%.
Despite the near-term strength, crude oil is still being pumped into storage, creating the possibility that any gains prompted by strong demand will be limited. Essentially, the market remains extremely oversupplied, but OPEC+ production cuts and other voluntary curtailments may be starting to have an impact on supply. Furthermore, the easing of economic restrictions could start to show the modest beginnings of demand recovery, but there is still a long way to go before the devastating demand destruction is erased.
Supply Side: Production Cuts Begin
The Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, a group known as OPEC+, began implementing a deal on record supply cuts amounting to 9.7 million barrels per day (bpd) from the start of May.
Meanwhile, North American oil companies are cutting production quicker than OPEC officials and industry analysts expected and are on track to…
U.S. West Texas Intermediate crude oil futures are in a position to close higher for a second consecutive week on Friday as more countries moved forward with plans to ease economic and social restrictions put in place to halt the coronavirus pandemic and as more output was reduced.
Nearby WTI crude oil and international-benchmark Brent crude oil are heading for the second week of gains after hitting what looks like a major low in April, when U.S. oil crashed below $0.00, with WTI up about 20% this week and Brent advancing close to 12%.
Despite the near-term strength, crude oil is still being pumped into storage, creating the possibility that any gains prompted by strong demand will be limited. Essentially, the market remains extremely oversupplied, but OPEC+ production cuts and other voluntary curtailments may be starting to have an impact on supply. Furthermore, the easing of economic restrictions could start to show the modest beginnings of demand recovery, but there is still a long way to go before the devastating demand destruction is erased.
Supply Side: Production Cuts Begin
The Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, a group known as OPEC+, began implementing a deal on record supply cuts amounting to 9.7 million barrels per day (bpd) from the start of May.
Meanwhile, North American oil companies are cutting production quicker than OPEC officials and industry analysts expected and are on track to withdraw about 1.7 million bpd of output by the end of June.
Supply Side: U.S. Energy Information Administration Weekly Inventories Report
The EIA reported Wednesday that U.S. crude inventories rose 4.6 million barrels for the week ended May 1. The data, which excludes changes in the Strategic Petroleum Reserve, marked a 15th consecutive weekly rise, but was smaller than the average increase of 7.1 million barrels forecast by analysts.
Crude stocks at the Cushing, Oklahoma futures hub rose about 2 million barrels for the week. Domestic crude production totaled 11.9 million barrels a day, down 200,000 bpd, the EIA data showed.
Gasoline supply fell by 3.2 million barrels and distillate stockpiles rose by 9.5 million barrels, the EIA said. Ahead of the report, surveys showed expectations for a supply decline of 400,000 barrels for gasoline, while distillate stocks were forecast at 3.5 million barrels higher.
Demand Side: China Crude Imports Rise
China showed crude imports rose last month. Imports climbed to 10.42 million barrels per day (bpd) in April from 9.68 million bpd in March, according to Reuters calculations based on customs data from the first four months of 2020. However, overall exports from China also rose against expectations of a sharp drop, though a big drop in total imports suggested any recovery is some way off as economies around the world fall into recession, meaning demand for fuels will likely remain subdued at best.
Demand Side: More Countries Begin to Ease Restrictions
Australia became the latest country to plan an easing of lockdown restrictions as infections from the coronavirus slow to a trickle, aiming to relax social distancing restrictions in a three-stage process.
France, parts of the United States and countries such as Pakistan are also planning to ease restrictions to stop the spread of the world’s worst health crisis in a century, Reuters wrote.
Weekly Outlook
The markets have been rallying for two weeks as investors have keyed in on signs of a slowdown in production and the easing of coronavirus-related restrictions across the globe. Back to back smaller than expected crude oil inventory builds have been supportive, but the rise in distillate stockpiles offset that news.
Positive geopolitical developments could be the bullish wildcard next week. On Friday, the markets garnered a little support after U.S. and Chinese officials discussed a trade deal agreed before the coronavirus outbreak, with both sides agreeing to implement the agreement.
We’re seeing a lot of short-covering, but traders have been reluctant to go long given the bearish fundamentals. This may change if prices pullback into a value area. Furthermore, traders are not going to gain confidence in playing the long side until they start to see that the attempts to reopen the economy are proving to be successful.
Despite the recent strength, traders should continue to look for heightened volatility and the possibility of a wicked two-sided trade as some momentum traders get bullish on the easing of restrictions and some turn bearish again as inventories continue to build.
Technical Analysis
Weekly July West Texas Intermediate Crude Oil
The main trend is down according to the weekly swing chart, but the closing price reversal bottom from the week ending May 1 and its subsequent confirmation, helped shift momentum to the upside.
The actual main trend will change to up on a trade through the last main bottom at $54.86. This is highly unlikely, however, there is room to the upside for the market to complete a normal 50% to 61.8% retracement.
A trade through $17.27 will negate the closing price reversal bottom and signal a resumption of the downtrend.
The minor trend is also down. A trade through $35.18 will change the minor trend to up. This will confirm the shift in momentum to up.
The minor range is $37.64 to $17.27. Its 50% level at $27.46 is providing resistance. This price level is also controlling the short-term direction of the market.
The short-term range is $54.86 to $17.27. Its 50% level at $36.07 is the next potential upside target. The main range at $40.11 to $45.50 is the major upside target.
Weekly Forecast
Based on this week’s price action, the direction of the July WTI crude oil market the week-ending May 15 is likely to be determined by a downtrending Gann angle at $26.95.
Bullish Scenario
A sustained move over $26.95 will indicate the presence of buyers. This could lead to a labored rally with targets including a 50% level at $27.46, followed by another downtrending Gann angle at $30.86. This is a potential trigger point for an acceleration to the upside with the next target a 50% level at $36.07.
Bearish Scenario
A sustained move under $26.95 will signal the presence of sellers. The first target is a minor pivot at $22.93, followed by the reversal bottom at $17.27.
Technical Outlook
In order to generate the momentum needed to drive this market away from the late April bottom, the buying is going to have to be strong enough to overcome the pair of downtrending Gann angles at $26.95 and $30.86.
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