Why OPEC’s Plan To Pump More Crude Won’t Rescue The Market

U.S. West Texas Intermediate crude oil futures are edging higher in a mixed trade on Friday. Pressuring prices early in the session was OPEC+’s decision to raise production targets slightly more than planned. Nonetheless, the market remains underpinned by tight global supply and rising demand due to China’s easing of COVID restrictions.

The U.S. benchmark is on track for a sixth weekly gain on tight U.S. supply, which has prompted talk of fuel export curbs or a windfall tax on oil and gas producers.

Expectations that supply will stay tight is underpinning prices early Friday. This is probably because OPEC and its allies under-delivered.

OPEC+ divided its output increase across its members and still included Russia, whose output is falling due to sanctions and some buyers avoiding its oil over the invasion of Ukraine, suggesting the boost will undershoot the level that the market needs to overcome the supply shortage.

Heightened Volatility is New Theme

Today’s relatively calm trade is a stark contrast to Thursday’s volatile session that saw prices soar more than 1% following early weakness after U.S. crude inventories fell more than expected amid high demand for fuel. Thursday’s rally took place despite OPEC+’s agreement to boost crude output to compensate for a drop in Russian production.

Market Starts Week on Strong Note

U.S. West Texas Intermediate crude oil futures opened the week sharply higher on Tuesday on the back of bullish news out of Europe. The catalyst fueling the rally was the European Union’s agreement to slash oil imports from Russia. Traders are now bracing for tighter supply amid rising demand ahead of peak U.S. and European summer driving season. It turned out to be the perfect setup for bullish traders.

The Key Bullish Events

The EU agreed in principle to cut 90% of oil imports from Russia by the end of 2022. This should tighten already tight global supplies.

The reopening of China is also underpinning prices. Traders are betting on a surge in demand from China after the easing of COVID-19 curbs.

Adding further to the bullish supply/demand situation are expectations of increased demand for crude oil products like heating oil and gasoline. Demand for the latter is expected to surge over the near-term due to the start of the summer driving season in the United States and Europe.

Weekly Technical Analysis

Weekly July WTI Crude Oil

Trend Indicator Analysis        

The main trend is up according to the weekly swing chart. The main trend was reaffirmed this week when buyers took out the previous main top at $116.43.

A trade through $61.32 will change the main trend to down. This is highly unlikely, but due to the prolonged move up in terms of price and time, the market is currently inside the window of time for a potentially bearish closing price reversal top.

Retracement Level Analysis

The first minor range is $96.93 to $119.98. The market is currently trading on the strong side of its 50% level at $108.46, making it support.

The short-term range is $88.53 to $119.98. Its retracement zone at $104.26 to $100.54 is the best support and a value zone. Since the main trend is up, a break back into this area is likely to attract new buyers.

The main range is $61.32 to $119.98. Its retracement zone at $90.65 to $83.73 is controlling the long-term direction of the market.

Weekly Technical Forecast

The direction of the July WTI crude oil market the week-ending June 10 will be determined by trader reaction to $115.07.

Bullish Scenario

A sustained move over $115.07 will indicate the presence of buyers. If this move creates enough upside momentum then look for a retest of this week’s high at $119.98. This is a potential trigger point for a surge into a series of nearby futures contract highs at $121.17, $126.42 and $130.50.  

Bearish Scenario

A sustained move under $115.07 will signal the presence of sellers. If this move creates enough downside momentum then look for a break into the first pivot at $108.46. Since the main trend is up, buyers could come in on a pullback into this level.  

A break through $108.46 will indicate the selling pressure is getting stronger with $104.26 - $100.54 the next key target area. Look for stronger buying on a test of this area since it represents value.   

A failure to hold $110.54 will be a sign of weakness and could trigger an acceleration to the downside with $90.65 the next major target.

Short-Term Outlook

Traders should continue to expect heightened volatility since we’re in a headline driven market. Our bias is still to the upside because of tight supply and expectations of stronger demand from China. This should be more than enough to offset the OPEC+ production increase.

The next major move in crude oil actually comes down to whether bullish traders are willing to chase the market higher by buying new highs, or if they are patient enough to play for a pullback into support.

If the market was sitting near weekly support, we would probably be seeing more aggressive buying based on the current fundamentals. But since the market is up 11 weeks from its March low, traders are a little hesitant to buy strength.

Because of the prolonged rally, the technical picture may determine the direction of next week’s trade. A close above $115.07 will indicate there are still new buyers willing to enter new positions at the current lofty levels.

However, a close under $115.07 on Friday will be a sign that the selling is greater than the buying at current levels. If confirmed next week with follow-through selling, we could see the start of a 2 – 3 week correction with $104.26 to $100.54 a potential target zone. A move into this area will likely be very attractive to new buyers.

This move won’t change the trend to down, but it will alleviate some of the upside pressure and overbought technical conditions.