Oil Traders Fear Second Round Of Demand Destruction

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Friday and could end the week with a loss after OPEC and other major producers including Russia agreed to ease record supply curbs from August.

The move is risky because the rise in coronavirus infections in the United States and around the world could lead to a second round of demand destruction if the outbreak cannot be contained. However, some traders are downplaying the threat, citing tightening global inventories and a pick-up in the economy as reasons to remain optimistic.

OPEC+ Says Production Cuts Will Be Tapered

OPEC and its allies agreed on Wednesday to scale back oil production cuts from August as the global economy slowly recovers from the coronavirus pandemic.

OPEC+ has been reducing output since May by 9.7 million barrels per day, or 10% of global supply, but from August, cuts will officially taper to 7.7 million bpd until December.

Despite the official OPEC+ accord, Saudi Arabian Energy Minister Prince Abdulaziz bin Salman said production cuts in August and September would end up amounting to about 8.1 million-8.3million bpd, more than the headline number. That's because countries in the grouping which over-produced earlier this year would compensate by making extra August-September cuts, the minister said.

Other News

International Energy Agency Executive Director Fatih Birol said on Wednesday that global oil markets are slowly rebalancing after the shocks seen during the coronavirus lockdown, with prices expected at about $40/barrel in the coming months.

Weekly Outlook

Friday's price action indicates that some investors are booking profits after the OPEC+ decision, but the big reduction in U.S. crude supplies provided some support. On Wednesday, the Energy information Administration (EIA) said U.S. crude inventories fell 7.5 million barrels the week-ending July 10. This was more than the 2.1 million-barrel drawdown predicted by analyst.

Analysts at Rystad Energy said in a note that oil prices are expected to remain static as an increase in crude processed by refineries is likely to offset higher supply volumes.

"We find that prices will have to stay where they are for the rest of 2020 as any uptick will hurt already struggling refining margins and negatively impact the most-needed recovery in refinery runs."

After a short-term setback, prices are likely to stabilize as long as the economy continues to improve. However, raising supply even slightly, combined with another drop in demand due to COVID-19, could trigger even steeper losses.

Technical Analysis      

Weekly September West Texas Intermediate Crude Oil

Weekly Technical Analysis

The main trend is up according to the weekly swing chart, but momentum is showing signs of shifting to the downside. A trade through $41.74 will signal a resumption of the uptrend, while a move through $35.01 will change the main trend to down.

The main range is $61.44 to $21.99. Its 50% to 61.8% retracement zone at $41.72 to $46.37 is providing resistance.

The minor range is $35.01 to $41.74. Its 50% level at $38.38 is providing support.

The short-term range is $21.99 to $41.74. If the main trend changes to down then its retracement zone at $31.87 to $29.53 will become support.

Weekly Technical Forecast

Bullish Scenario

A sustained move over $41.74 will indicate the presence of strong buyers. If this creates enough upside momentum then look for the rally to possibly extend into the Fibonacci level at $46.37.

Bearish Scenario

A sustained move under the main 50% level at $41.72 will signal the presence of strong sellers. This could trigger another test of the minor 50% level at $38.38.

The selling pressure could pick up under $38.38 with $35.01 a near-term target. If this fails then look for the selling to possibly extend into the short-term retracement zone at $31.87 to $29.53.

Conclusion

Given the rise in the number of COVID-19 infections in the United States and the possibility of new restrictions and lockdowns, the crude oil traders could feel some pain if $38.38 fails as support.

Bearish traders have been successfully defending $41.72 for six weeks so it may be time to probe the downside to see if the buying power is real.

The two levels to concentrate on during the upcoming week are $38.38 and $41.72. A short-term downtrend could develop under $38.38 with $35.01 the minimum downside target. Meanwhile, the uptrend could resume if buyers can take out $41.72 with conviction.

At the start of the new week, possible renewed demand destruction will be the main focus, but all of this could change to the better if the U.S. supply numbers continue to improve. However, we're likely in for a steep break if both demand and supply indicators turn bearish.