Recovering Demand Sparks Optimism In Oil Markets

U.S. West Texas Intermediate crude oil futures finished higher this week following some friendly news from OPEC+ on Thursday. The market was poised to finish the week lower until OPEC and its allies made an announcement that may have shook a few of the weaker shorts out of their positions.

Up until then, the catalysts weighing on prices were the restarting of traffic on the Suez Canal after a huge ship blocking the landmark was freed earlier in the week, mixed U.S. inventories data, a stronger U.S. Dollar, fear of increasing supply from Iran and concern over a weakening demand recovery.

OPEC+ Agrees to Gradually Boost Crude Oil Output

OPEC and its allies announced that they have decided to gradually increase oil production by some 2 million barrels per day from May to July, moving cautiously in pace with the recovery of the global economy from the COVID-19 pandemic.

According to reports, the group known as OPEC+ is restoring production that was slashed last year to support prices as demand sagged during the worst of the pandemic recession, which sapped demand for fuel. The group will add back 350,000 barrels per day in May, 350,000 in June, and 400,000 in July.

Traders reacted by driving prices higher on Thursday, suggesting they had been pricing in a more aggressive rise in output for May. Despite the rally, the news isn’t especially bullish so gains could be limited over the near-term.

Traffic Starts Flowing on the Suez Canal

Ships were moving through the Suez Canal again on Tuesday after tugs refloated the giant Ever Given container carrier, which had been blocking a narrow section of the passage for almost a week, causing a huge build-up of vessels around the waterway.

The news of the blockage triggered a powerful short-covering rally last week because of the fear it could impact the flow of supply, but the reopening of the canal dampened supply concerns, leading to a retracement of the earlier rally.

US Stockpile Data Mixed

The API reported a build in crude oil inventories of 3.910 million barrels for the week ending March 26. Analysts were looking for a small build of 107,000 barrels for the week. The EIA reported that crude inventories fell by 876,000 barrels in the week to March 26. This was slightly below the consensus estimate of a 1.3 million barrel draw.

The difference in the API and EIA crude inventory numbers suggests the market is still trying to recover from the deep freeze in Texas in February.

Other Potential Bearish Factors

China is ignoring U.S. and United Nations sanctions and importing higher amounts of Iranian oil, according to traders and analysts. China may receive as much as 1 million barrels a day this month in imports from Iran passed off as crude from other origins.

In Europe, rising numbers in a third wave of infections are alarming authorities, with France’s Finance Minister Bruno Le Maire saying “all options are on the table” to protect the public.

Weekly Technical Analysis

Weekly May WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. However, momentum is trending lower.  A trade through $67.79 will negate the closing price reversal top and signal a resumption of the uptrend.

The nearest main bottom is at $36.00. Taking out this price will change the main trend to down. This is highly unlikely however.

The minor trend is also up. A new minor bottom was formed at $57.25 this week. A trade through this level will change the minor trend to down, while reaffirming shift in momentum.

The first minor range is $67.79 to $57.25. The market closed slightly under its pivot at $62.52.  

The second minor range is $51.24 to $67.79. Buyers came in following a test of its 50% level at $59.42 this week.

The short-term range is $36.00 to $67.79. Its 50% level at $48.40 is the primary downside target and value level. Buyers re likely to come in strong if this price is ever tested.

The contract range is $29.00 to $67.79. Its 50% level at $48.40 is controlling the longer-term direction of May WTI futures.

Weekly Technical Forecast

The direction of the May WTI crude oil market the week-ending April 9 will be determined by trader reaction to the minor pivots at $62.52 and $59.52.

Bullish Scenario

A sustained move over $62.52 will signal the presence of buyers. If this move creates enough upside momentum then look for the rally to extend into $65.00, followed by the contract high at $67.79.

Bearish Scenario

A sustained move under $59.52 will indicate the presence of sellers. Taking out $57.25 will indicate the selling pressure is getting stronger. This could trigger an acceleration to the downside with $51.90 to $51.24 the next downside target zone.

Short-Term Outlook

May WTI crude oil was mostly rangebound this week, but with a slight bias to the upside. Holding inside the $59.52 to $62.52 price range will indicate investor indecision and impending volatility. The upside bias gets stronger on a sustained move over $62.52, while a sustained move under $59.52 will signal the return of sellers.

The weekly chart suggests that any attempt to breakout to the upside will be a labored event, while a breakdown under $57.25 could trigger an acceleration to the downside. In other words, the way of least resistance is to the downside.

The fundamental news appears to be bearish on paper despite Thursday’s rally, which may have been fueled by thin, pre-holiday trading volume. I can’t see how increasing supply even gradually while the world experiences another surge in COVID-19 cases could lead to another new high in the market.

Furthermore, Iranian supply is increasing despite sanctions and OPEC even lowered its expected demand for the rest of the year.

In my opinion, traders are going to start selling rallies in an effort to drive prices through recent support levels later in the month.