The Next Big Wildcard For Oil Markets

U.S. West Texas Intermediate crude oil is edging lower at the end of the week with prices being dragged down by weak U.S. fuel demand, fears of a second wave of coronavirus cases in South Korea and a worsening in U.S.-China relations. Nonetheless, the markets remain on track for a hefty monthly gain.

The WTI contract is also in a position to post its first weekly loss after four consecutive weeks of gains that leaves it set for its biggest monthly gain in years thanks to production cuts and optimism over Chinese-led demand recovery, analysts said.

July WTI is on track for a record monthly gain of 54% in May that would represent its strongest monthly rise since March 1999, Reuters said.

There are headwinds, however, which are likely the reason behind this week’s abrupt halt of the current rally. These headwinds include possible U.S. sanctions against China over its treatment of Hong Kong, Russia’s lack of participation in an extension of the OPEC+ production cuts, and weak U.S. demand.

Trump to Announce US Response to China’s Treatment of Hong Kong

U.S. President Donald Trump is expected to hold a news conference on China later on Friday as his administration moves to pressure Beijing over its treatment of Hong Kong.

Traders will be looking for guidance to see whether Trump’s announcement triggers further escalation between the two largest economies. After Trump’s speech, traders will be looking to react to China’s response.

Even with the global economy reopening, economic conditions remain weak. So with this new geopolitical tension, it means that recovery in many parts of the world can take longer, which could put pressure on crude oil demand and prices.

Russia’s Commitment to OPEC+ Supply Cuts is questioned

On the demand front, traders are becoming a little worried about Russia’s commitment to deeper than agreed upon oil production cuts ahead of a June 9 meeting of the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+.

Earlier in the week, Russian Energy Minister Alexander Novak met with domestic major oil companies to discuss the implementation of global oil production curbs and the possible extension of the current level of cuts beyond June, sources familiar with the plans told Reuters.

This news actually comes as no surprise. Often ahead of an important OPEC+ meeting, traders question Russia’s commitment to any proposed deal. Historically, Russia has been the last major producer to approve production cuts.

Signs of Lower US Demand as EIA Inventories Rise

Thursday’s data from the Energy Information Administration (EIA) showed that U.S. crude oil and distillate inventories rose sharply last week. Fuel demand remained slack even as various states lifted travel restrictions they had imposed to curb the coronavirus pandemic, analysts said.

Fundamentals Summary

The biggest issue that crude oil traders will face over the near-term will be the impact of China’s response to the widely expected U.S. sanctions against the world’s second-largest economy.

Steep sanctions by the U.S. and equally severe retaliation by China could create similar conditions to a trade war. This won’t be good for the global economy especially at a time when it’s just starting to recover from the damage cause by the coronavirus pandemic.

On the positive side, traders shouldn’t worry about Russia’s participation in an extension of the production cuts. There is just too much evidence supporting their positive influence on prices. Expect Russia to approve an extension.

Furthermore, although U.S. inventories rose last week, storage in Cushing, Oklahoma, the main delivery point in WTI, decreased by 3.4 million barrels, and refinery utilization also rose 71% from 69%. All the EIA report told us is that changes are going to be gradual.

The wildcard over the next few months is going to be a second-wave of coronavirus outbreaks. South Korea is going back to strict restrictions. The CDC is warning about a second wave. The U.S. economy will be hit hard if there is a resurgence with the re-opening of the economy moving slower than anticipated.

Weekly Technical Analysis

Weekly July WTI Crude Oil

Trend Indicator 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 at $17.27 during the week ending May 1.

The main trend will change to up on a trade through $54.86. This is not likely over the near-term because of a series of potential resistance levels blocking the market’s progress.

Furthermore, the market is overdue for a short-term correction of the recent rally. This move may be necessary to solidify the bottoming process. Essentially, the market is more likely to rally further if it has a solid support base. At this time, there is no support base.

On the upside, the short-term range is $54.86 to $17.27. Its 50% level at $36.07 is the nearest resistance level. The main range is $62.95 to $17.27. Its 50% level is the primary upside target at $40.11.

On the downside, the minor range is $17.27 to $34.81. Its 50% level at $26.04 is the primary downside target.

Weekly Technical Forecast

The key area to watch the week-ending June 5 is $36.07 to $37.27. Trader reaction to this area should determine the direction of the July WTI crude oil market.

Bullish Scenario

Overcoming the 50% level at $36.07 will be the first sign of strength. Overtaking the steep uptrending Gann angle at $37.27 will indicate the buying is getting stronger. This could trigger an acceleration to the upside with potential upside targets coming in at $39.86 and $40.18.

Bearish Scenario

The inability to overcome and sustain a rally over $36.07 will signal the presence of sellers. If this move is able to create enough downside momentum then look for the start of a pullback into $27.27 to $26.04.

Technical Summary

July WTI crude oil has been climbing higher at a pace of $4.00 per week since the week ending May 1. However, this week’s price action suggests the uptrend may be weakening.

If the buying continues to weaken then look for the start of a near-term correction into $26.04. This may be the best buying opportunity. The formation of a secondary higher bottom following a test of this level will be a sign that real buyers are re-entering the market. This could eventually change the main trend to up.

The first four-week rally was basically driven by short-covering. The next rally will be driven by new buyers.