Unexpectedly Strong Jobs Report Sends Oil Soaring

U.S. West Texas Intermediate crude oil futures are trading at their highest levels of the week on Friday and inside the price gap created on March 9 when the market opened sharply lower, officially starting the coronavirus-related plunge. The price action strongly suggests the buying is getting stronger especially if traders fill the gap.

The market was initially supported after a report said OPEC and its allies led by Russia would meet on Saturday to discuss extending record oil production cuts and to approve a new approach that aims to force laggards such as Iraq and Nigeria to comply better with the existing curbs.

A second surge in the market occurred following the release of a much better-than-expected U.S. Non-Farm Payrolls report. This surprisingly strong report is a sign that the economy is improving much faster than previously expected, meaning that demand will pick up at a much faster pace than currently estimated.

OPEC+ Wants an Extension and Better Compliance

Saturday’s meetings would start with talks between members of the Organization of the Petroleum Exporting Countries and be followed by a gathering of the OPEC+ group, an OPEC+ source said, after Algerian and Russian media reported the meetings, Reuters reported.

Two OPEC+ sources said Saudi Arabia and Russia had agreed to extend the deeper cuts until the end of July but they said Riyadh was also pushing to extend them until the end of August.

Three OPEC sources said an extension to cuts was contingent on high compliance and countries that produced above quota in May and June must promise to adhere to targets and agree to compensate for any earlier overproduction by cutting more in July, August and September.

Iraq, which had one of the worst compliance rates in May according to a Reuters survey of OPEC production, agreed to the additional pledge, OPEC sources said.

US Non-Farm Payrolls Report May Be Early Sign That Economy is Coming Back                                                                                                                                       

The 2.5 million jobs added last month may be evidence the U.S. economy was bouncing back from the coronavirus-induced devastation. Economists had forecast that Non-Farm Payrolls would drop by 8.3 million and the jobless rate would increase to 19.5% from April’s 14.7 rate on 20.7 million job losses. The nation’s unemployment rate in May declined to 13.3%, according to the Labor Department.

The unexpected strength of the report has crude oil traders already altering demand models to reflect a much faster recovery in the economy. And this is a positive thing because earlier in the week, traders were expressing concerns about rapidly rising gasoline and distillate inventories.

EIA Reports Huge Build in U.S. Distillate Inventories

The U.S. Energy Information Administration (EIA) said on Wednesday that crude oil inventory fell 2.10 million barrels during the week-ending May 29. This was lower than the 3.00 million barrel forecast. Prices bounced higher on the news.

Gains were limited, however, because the report also showed gasoline stocks rose by 2.8 million barrels, nearly triple what analysts had expected, while distillate stocks rose by 9.9 million barrels, or nearly four times more than expected.

Overall demand for diesel and similar fuels is down 13% from the year-earlier period over the last four weeks. Gasoline product supplied, a proxy for demand, picked up last week, but the four-week average still shows a 23% drop from the year-earlier period.

Rising gasoline and distillate numbers could’ve developed into a major concern for bullish traders watching the demand figures. However, the surprisingly strong jobs report likely means traders will tolerate these high numbers, knowing that a jump in demand may be coming to offset the surge in supply.

Technical Analysis      

Weekly July West Texas Intermediate Crude Oil

Weekly Forecast

The main trend is down according to the weekly swing chart, however, momentum has been trending higher since the week-ending May 1. A trade through $54.86 will change the main trend to up, while a move through $17.27 will signal a resumption of the uptrend.

The short-term range is $54.86 to $17.27. The market is currently trading on the strong side of its 50% level at $36.07, helping to generate a solid upside bias. This price is new support.

The main range is $62.95 to $17.27. Its retracement zone at $40.18 to $45.57 is the primary upside target. If we’re going to see new sellers then they are likely to show up following a test of this area.

Based on this week’s price action, the direction of the July WTI crude oil market the week-ending June 12 is likely to be determined by trader reaction to a downtrending Gann angle at $40.95.

Bullish Scenario

A sustained move over $38.86 will indicate the presence of buyers. This could lead to a labored rally with potential resistance a 50% level at $40.18, a downtrending Gann angle at $40.95 and an uptrending Gann angle at $41.27.

Crossing to the strong side of $41.27 will indicate the buying is getting stronger. This could trigger an acceleration to the upside with the next target the main Fibonacci level at $45.57.

Bearish Scenario

A sustained move under $38.86 will signal the presence of sellers. This could lead to a quick test of the main 50% level at $36.07. This is a potential trigger point for an acceleration to the downside with $29.27 the primary downside target.

Conclusion

As of Friday, the fundamentals are bullish. OPEC+ is expected to take care of any supply issues, while the recovery in the U.S. economy is likely to lead to a rapid improvement in the demand outlook.

The lingering effects of the strong job market report could last for weeks as the economy continues to reopen. However, with OPEC+ yet to approve the extension cuts, oversupply could remain a concern next week if OPEC and its allies can’t come to an agreement on Saturday.

This is not likely, however, because OPEC+ knows that a combination of limited supply and strong demand can only drive prices higher.