The First Signs Of Real Oil Demand Recovery Are Here

U.S. West Texas Intermediate crude oil futures are breaking out to the upside of a seven-session trading range, solidifying its third consecutive weekly higher close.

The catalyst behind Friday’s strength is a report that showed China’s daily crude oil throughput rebounded in April from a 15-month low in March as refiners cranked up operations to meet renewed fuel demand after lockdowns imposed to prevent the spread of the coronavirus outbreak were eased.

Friday’s move is impressive, but upside momentum had been building most of the week with the market underpinned by a friendly government inventories report, the announcement of government crude oil purchases for its strategic reserve and a dampening of concerns over rising supply by the International Energy Agency (IEA).

China’s Daily Crude Oil Throughput Rebounds

China processed a total of 53.85 million tonnes of crude oil last month, data from the National Bureau of Statistics (NBS) showed on Friday, equivalent to about 13.1 million barrels per day (bpd). That was some 11% higher than 11.78 million bpd in March.

The agency said on Friday it had adjusted the database of industrial enterprises it uses to help compile a range of production numbers. On that basis, April’s crude oil throughput was 0.8% above the year-ago level, it said; a Reuters calculation using NBS data from last year put the rise at 3.4%.

Additionally, state-backed refiners have pushed up crude oil processing rates to around 79% in May, according to estimates from consultancy Longzhong Information Group, close to January’s 82% level before extensive movement restrictions were imposed to prevent the coronavirus spreading.

US to Buy Up to 1 Million Bbls of Oil for Emergency Reserve

The U.S. Energy Department said on Wednesday it will buy up to 1 million barrels of sweet crude for the government’s emergency petroleum reserve as part an effort to help producers struggling as the coronavirus strangles oil demand, as reported by Reuters.

The purchase of up to 1 million barrels “will serve as a test of the current conditions of physical crude oil available to the SPR as opposed to the financial market trading WTI NYMEX futures contracts,” the department said in a release. The department will purchase the oil from small to midsize domestic producers, it said.

Upbeat Supply/Demand Estimates

Oil prices are also being underpinned after a drop in U.S. crude stocks and an IEA forecast for lower global stockpiles in the second half. On Wednesday, the U.S. government reported that crude inventories fell for the first time in 15 weeks. Meanwhile, the International Energy Agency (IEA) on Thursday again forecast a record drop in demand in 2020 though it trimmed its estimate of the fall citing easing lockdown measures.

Weekly Technical Analysis

Weekly July WTI Crude Oil

Trend Analysis

The main trend is down according to the weekly swing chart, however, momentum has been trending higher since the formation of the closing price reversal bottom the week-ending May 1.

The main trend will change to up on a trade through the nearest swing top at $54.86. This is highly unlikely, but there is room for 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.

The minor range is $37.64 to $17.27. Its 50% level at $27.46 is controlling the near-term direction of the market.

The short-term range is $54.86 to $17.27. Its 50% level at $36.07 is the primary upside target.

The weekly gap at $37.64 to $41.88 is another potential resistance zone.

The main range is $62.95 to $17.27. Its retracement zone at $40.11 to $45.50 is controlling the longer-term direction of the market.

Weekly Technical Forecast

Based on this week’s price action, the direction of the July WTI crude oil market the week-ending May 22 is likely to be determined by trader reaction to the 50% level at $27.46.

Bullish Scenario

A sustained move over $27.46 will indicate the presence of buyers. This could trigger a rally into the downtrending Gann angle at $28.86.

Since the main trend is down, sellers could come in on the first test of $28.86, however, overtaking it could trigger an acceleration to the upside with near-term targets the minor top at $35.18 and the 50% level at $36.07.

Bearish Scenario

A sustained move under $27.46 will signal the presence of sellers. The first downside target is a downtrending Gann angle at $24.95. Crossing to the weak side of this angle will put the market in a bearish position with the first target a minor 50% level at $23.14, followed by the main bottom at $17.27.

Weekly Outlook

Prices have ticked up in the past two weeks as some countries relaxed coronavirus restrictions and lockdowns to allow factories and shops to reopen. However, the emergence of new cases in South Korea and China raised concerns over a possible second wave of infections which would weigh on economic recovery and fuel demand.

Meanwhile, speaking to lawmakers on Tuesday, the White House task force coronavirus expert, Dr. Anthony Fauci, warned that relaxing stay-at-home rules too quickly could bring more “suffering and death”.

Additionally, U.S. Federal Reserve Chairman Jerome Powell also warned on Wednesday of an “extended period” of weak economic growth.

Recovering demand and lower output are helping to underpin prices but a second wave of coronavirus cases would push prices back down. This is why we expect the buying to be a little tentative despite signs of better demand from China. Traders need to see the easing of restrictions is working and that the number of coronavirus cases have leveled off before we’ll see aggressive buying.

At this time, the market is merely reacting to the start of the OPEC-led production cuts, lower U.S. production and a slight uptick in demand. However, we’re going to need to see a huge surge in demand from the leveling of the number of new coronavirus cases before we can confirm the bottom is in. Meanwhile, a second wave of outbreaks would be devastating to the global economy.