Three Bullish Factors That Could Send Oil To $120

U.S. West Texas Intermediate crude oil futures are trading nearly flat on Friday, while continuing to hover near its more than two-month high. Helping to underpin prices is the prospect of a European Union (EU) ban on Russian energy products and expectations of tighter U.S. gasoline supplies.

Two Factors Attracting the Most Attention

The focus for traders this week has been supply. And two events have garnered most of the attention:  The possible ban on Russian crude exports and the significant tightness in U.S. product inventories.

The EU may announce the ban on May 30 at nearly the same time the U.S. begins its high demand summer driving season. Both moves will tighten supply.

But there is a third factor developing. Bullish traders are hoping China starts to lift its COVID-related restrictions while at the same time announcing more measures to support the economy. This could give demand a much-needed boost.

EU Waiting for Hungary’s Approval

Early next week, the European Commission will try to obtain the unanimous support of all 27 EU member states for its proposed new sanctions against Russia. However, Hungary isn’t quite on the same page as the other 26 members.

According to Reuters, a top Hungarian aide said the country needed 3-1/2 to 4 years to shift away from Russian crude and make huge investments to adjust its economy. Hungary could not back the EU’s proposed oil embargo until there was a deal on all issues.

At this time, this is a significant stumbling block.

High Prices Not Bothering US Motorists

Ahead of this weekend’s U.S. Memorial Day holiday and the start of the summer driving season, U.S. gasoline prices are hovering near record highs.

According to the American Automobile Association (AAA), miles traveled by motorists rose 5.6% in the first three months of the year even as the price of a gallon of regular gasoline has jumped 50% in the last year, to nearly $4.60 on average nationally.

Drivers don’t seem to be bothered by high prices, however, with this Memorial Day weekend travel expected to be the busiest in two years. More importantly, it will serve as a gauge as to how much consumers are willing to tolerate fuel price increases.

If U.S. motorists continue to show little concern for high prices then stockpiles will continue to dwindle and prices will continue to rise, probably reaching nearly $5.00 per gallon before long.

Finally, consumption of motor gasoline is set to hit 9.12 million barrels per day (bpd) this month, and reach a peak for this summer at 9.31 million bpd in July, according to EIA data.

EIA Reports Tight Supply, Rising US Refining Activity       

The US Energy Information Administration (EIA) reported on Wednesday that crude stockpiles fell 1 million barrels last week with gasoline inventories also edging lower. Distillate stocks rose 1.7 million barrels. Refiners picked up the pace of processing, boosting capacity use to 93.2%, its highest since December 2019.

Refiners have had to keep facilities running at full tilt to deal with heavy demand, especially from overseas, as refined product exports rose to more than 6.2 million barrels per day last week. High exports and a reduction in refining capacity mean gasoline stocks have dwindled in the United States.

Weekly Technical Analysis

Weekly July WTI Crude Oil

Trend Indicator Analysis        

The main trend is up according to the weekly swing chart. A trade through $116.43 will signal a resumption of the uptrend. A move through $61.32 will change the main trend to down. This is highly unlikely, however.

The minor trend is also up. The uptrend was reaffirmed this week when buyers took out last week’s high at $113.20. A trade through $96.93 will change the minor trend to down. This will shift momentum to the downside.

Retracement Level Analysis

The first minor range is $116.43 to $88.53. The market is currently trading on the strong side of its retracement zone at $105.77 to $102.48, making it support.  

If $102.78 fails as support then we could see an acceleration to the downside with the short-term retracement zone at $88.88 to $82.37 the next target.

The main range is $34.55 to $116.43. If $82.37 fails as support then look for the selling to extend into its retracement zone at $75.49 to $65.83.

Weekly Technical Forecast

The direction of the June WTI crude oil market the week-ending June 3 will be determined by trader reaction to $110.28.

Bullish Scenario

A sustained move over $110.28 will indicate the presence of buyers. If this move creates enough upside momentum then look for a retest of this week’s high at $114.99. This is a potential trigger point for a surge into the contract high at $116.43, followed by the near-term futures high of $121.17.

Bearish Scenario

A sustained move under $110.28 will signal the presence of sellers. If this move creates enough downside momentum then look for a break into the Fibonacci level at $105.77.

A break through $105.77 will be a sign of weakness with the 50% level at $102.48 the next target.  

A failure to hold $102.48 will indicate the selling pressure is getting stronger. This could trigger a break into the series of minor bottoms between $96.93 and $88.53 before reaching the $88.88 to $82.37.

Short-Term Outlook

Technically speaking, the market is in a strong position to challenge the main tops at $116.43 and $121.17. Furthermore, although crude oil may be vulnerable to a short-term correction on the daily chart, the weekly uptrend is not in a position to be threatened.

At this time, there is a strong bias to the upside and the potential for a major breakout over the March 2022 highs. It would probably take a complete collapse of the impending Russian energy ban or further lockdowns in China to derail this strong rally.

Fundamentally, the price action is bullish with a steady flow of bids, however, we do detect investor reluctance to chase prices higher. This may change when they see the details of an EU agreement to ban Russian energy products.

Also providing some support is the anticipation of the lifting of restrictions in China which could lead to a surge in demand.

Additional support is being provided by low U.S. gasoline stockpiles and the anticipation of greater demand for fuel as the U.S. begins its summer driving season this weekend.

This upcoming weekend’s U.S. Memorial Day travel is expected to be the busiest in two years, causing fuel demand to rise as more drivers hit the road and shake off coronavirus pandemic restrictions despite high fuel prices.

Consumption of motor gasoline is set to hit 9.12 million barrels per day (bpd) this month, and reach a peak for this summer at 9.31 million bpd in July, according to EIA data.

With the fundamentals stacked to the bullish side, we’re anticipating a continuation of the uptrend next week.