Oil Isn’t Ready To Rally

The week started out promising for crude oil traders, hoping for a boost in prices to shore up the U.S. oil industry and to stabilize prices. OPEC, Russia and other oil producing nations overcame a slight snag and finally agreed on Sunday to cut output by a record 9.7 million barrels per day for May-June, representing around 10% of global supply, to support oil prices amid the pandemic, according to Reuters.

The cut was the single largest output cut in history. The specific production numbers weren’t released, but we do know that the 9.7 million barrels per day cut will begin on May 1, and will extend through the end of June.

However, despite the efforts of OPEC+, oil prices continued to retreat throughout the week, hitting a multi-year low in the process.

As it turns out, the agreement wasn’t especially bullish. The production cuts were smaller than what the market needed and all they are likely to do is slow down the stock building constraints problem.

The move by OPEC+ is not big enough to plug the near-term imbalance, which could reach 15 to 20 million barrels per day. Additionally, storage tanks are expected to top out in May. Furthermore, the cuts are too short, ending in June. This is hardly enough time to bring stability and restore support to oil prices, leading some to speculate that OPEC may have to revisit the problem in June.

The cuts may make a difference during the second half of 2020, but that will likely accompany an uptick in demand if the world can gain control of the coronavirus outbreak.

EIA Reports Record Rise in Crude Supplies

The Energy Information Administration reported a rise of 19.2 million barrels in domestic crude supplies for the week ended April 10. That was the 12^th straight weekly climb. Analysts expected the data to show a rise of 10.1 million barrels.

Data from the EIA also showed that total U.S. crude production fell by 100,000 barrels a day to 12.3 million barrels. Gasoline supply rose 4.9 million barrels and distillate stockpiles added 6.3 million barrels, the EIA said. An analyst survey had shown expectations for a supply rise of 7.1 million barrels for gasoline, and distillate stockpiles were expected to climb by 1.8 million barrels.

International Energy Agency Predicts Demand Will Dive

The International Energy Agency (IEA) on Wednesday forecast a 29 million barrel per day (bpd) dive in April oil demand to levels not seen in 25 years and warned no output cut by producers could fully offset the near-term falls facing the market.

The IEA forecast a 9.3 million bpd drop in demand for 2020 despite what it called a “solid start” by producers following a record deal to curb supply in response to the coronavirus pandemic.

“By lowering the peak of the supply overhang and flattening the curve of the build-up in stocks, they help a complex system absorb the worst of this crisis,” the Paris-based IEA said in its monthly report.

“There is no feasible agreement that could cut supply by enough to offset such near-term demand losses. However, the past week’s achievements are a solid start.”

Selling Subsides a Little Ahead of Weekend

The markets were being underpinned ahead of the weekend by optimism over President Donald Trump’s plans to ease the U.S. coronavirus lockdown that could help to jump start the American economy. Gains are being capped, however, by China’s worst quarterly economic contraction on record.

Traders said the U.S. futures contract is also be weighed down by the imminent expiration of the May contract, and the rapidly-filling crude storage tanks. Traders are also in no hurry to buy crude with limited facilities to store it, and as refinery runs continue to be reduced tremendously.

Weekly Fundamental Forecast

Other than a periodic short-covering rally due to oversold technical conditions, crude oil is going to have a hard time rallying unless there is a major reduction in the number of coronavirus cases. Furthermore, traders want to see meaningful production cuts from outside the OPEC+ group. Eventually, market forces are going to force U.S. producers to cut back. This could provide some stability to the market.

Essentially, the bearish tone in the WTI market is being determined by the huge supply as reported by the EIA and the IEA’s forecast for a plunge in demand.

Technical Analysis

June West Texas Intermediate Crude Oil

Trend Indicator

The main trend is down according to the weekly swing chart. The market is in no position to change the main trend to up, but holding the mid-March bottom at $21.64 could help June WTI crude oil build a solid enough base to support a strong short-covering rally.

The short-term trend is also down. Taking out the short-term top at $34.04 won’t change the main trend to up, but it will shift momentum to the upside. Taking out $21.64 will reaffirm the downtrend.

The short-term range is $21.64 to $34.04. Its 50% level or pivot at $27.84 is controlling the weekly direction of the market.

On the upside, the nearest 50% level resistance comes in at $38.27.

Weekly Technical Forecast                                            

Based on this week’s price action, the direction of the June WTI crude oil market the week-ending April 24 is likely to be determined by trader reaction to the pivot at $27.84.

Bearish Scenario

A sustained move under $27.84 will indicate the presence of sellers. The first target is the main bottom at $21.64. Taking out this bottom will indicate the selling pressure is getting stronger. Crossing to the weak side of the downtrending Gann angle at $18.90 will put the June WTI futures contract in an extremely bearish position.

Bullish Scenario

A sustained move over $27.84 will signal the presence of buyers. If this move is able to create enough upside momentum then look for a potential spike into $34.04.