Oil Markets On Edge As ‘’Second Wave’’ Looms

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading higher on Friday and in a position to close higher for the week after OPEC producers and allies promised to meet supply cuts and signs of demand, hit the coronavirus crisis, recovering.

OPEC+ Laggards Pledge Better Compliance

Iraq and Kazakhstan, during a meeting of an OPEC+ panel on Thursday, pledged to comply better with oil cuts, sources said. This means curbs by the Organization of Petroleum Exporting Countries and allies, known as OPEC+, could deepen in July.

The strong comeback in the crude oil market after weakness earlier in the week indicates that investors believe that OPEC+ remains in control of the oil supply. This is helping to reduce the fear of another major oversupply situation that drove prices sharply lower from March to May. Furthermore, bullish investors are also increasing bets that OPEC+ compliance will improve in the coming months.

Brent Moves into Backwardation

In another bullish development, Brent crude oil on Thursday moved into backwardation, where oil for immediate delivery costs more than supply later, for the first time since March 1.

A premium for oil for immediate delivery usually indicates tightening supply and encourages storage to be drawn out.

US Refiners Aim to Lock in Crude Volumes after Getting Burned by Shut-ins: Reuters’ Sources

U.S. refiners and other buyers of crude oil are reworking some of their supply contracts to guarantee volumes after many were cut off unexpectedly when a price collapse this spring led drillers to curtail production, sources said.

The effort reflects concern in the refining industry about the possibility of another drop in oil prices as world markets continue to reel from the economic fallout of the coronavirus outbreak. Sellers will likely be forced to agree to the terms as buyers remain scarce in the oil market, traders and analysts said and Reuters reported.

Normally a drop in prices is good for refiners, but only when they can get their hands on the cheap supply. This move isn’t particularly bullish or bearish, but it means that U.S. refiners and other buyers of crude oil will be better prepared if a second wave of coronavirus leads to further demand destruction.

Rising Global Demand Concerns

Helping to cap gains this week are renewed worries about fuel demand after a surge in coronavirus cases in Beijing and the United States threatened to lockdown portions of the economy. In China, for example, the government shut down schools and cancelled flights. In the U.S., government officials in Texas, Florida and California are reconsidering imposing restrictions at bars and restaurants.

Mixed EIA Report Raises Hopes for Bulls

This week’s Energy Information Administration (EIA) government inventories report offered a ray of sunshine for the bulls after gasoline and distillate inventories fell unexpectedly. Additionally, crude oil output is now down at 10.5 million barrels per day as oil producers continued to slash output.

Weekly Technical Analysis

Weekly August WTI Crude Oil

Trend Indicator Analysis

The main trend is down according to the weekly swing chart; however, momentum has been trending to the upside since the week-ending April 24.

A trade through $54.71 will change the main trend to up. A move through $20.28 will signal a resumption of the downtrend.

The main range is $62.21 to $20.28. Its 50% to 61.8% retracement zone at $41.25 to $46.19 is the primary upside target. This zone is also controlling the longer-term direction of August WTI crude oil.

Weekly Technical Forecast

Given the price action over the last eight weeks, the direction of the August WTI crude oil futures contract the week-ending June 26 is likely to be determined by trader reaction to the downtrending Gann angle at $38.21.  

Bullish Scenario                                           

A sustained move over $38.21 will indicate the presence of buyers. If this creates enough upside momentum then look for the rally to extend into $41.25 to $46.19.

Bearish Scenario

A sustained move under $38.21 will signal the presence of sellers. This could trigger the start of a steep break with the first target zone $30.49 to $28.08.

Weekly Outlook

The price action suggests that traders are giving OPEC+ the benefit of the doubt that all of its participants will adhere to implement their share of the production cuts. If the laggard producers do compensate over the next three months for their overproduction that will effectively take extra barrels out of the market, even if OPEC+ does not extend its record 9.7 million barrels per day supply cut beyond July. This should be enough to underpin the market.

Technically, trader reaction to $41.25 to $46.19 should determine the longer-term direction of the August WTI crude oil market.

The wildcard is the rising number of new COVID-19 cases. Traders seem to be shrugging off a global surge at this time since they don’t believe it will lead to further demand destruction, but conditions can change fast.