- U.S. West Texas Intermediate crude oil futures are up for a third straight session.
- As major producers began output cuts to offset a slump in fuel demand triggered by the coronavirus pandemic.
- The data showed U.S. crude inventories grew less than expected.
- The imbalance between oil supply and demand is set to be halved to 13.6 million barrels per day (bpd) in May.
- It is to further drop to 6.1 million bpd in June, according to Rystad Energy.
A recently published article in oilprice.com reveals the futures that are now within striking distance of the close. This is before the steep drop that saw nearby May futures plunging into negative territory for the first time in history. This move would diminish the impact of last week’s historical break in crude oil, while giving it the appearance of capitulation.
OPEC+ production cuts begin
Reflecting the output cuts agreed between OPEC and other major producers like Russia, a grouping known as OPEC+, the imbalance between oil supply and demand is set to be halved to 13.6 million barrels per day (bpd) in May, and drop further to 6.1 million bpd in June, according to Rystad Energy.
US firms cutting production
Traders are saying production cuts of almost 10 million bpd by OPEC and its allies or about 10% of global production, due to take effect from May 1, are not going to have that much of an impact on prices without the United States curbing its own output.
While storage is rapidly filling up, production cuts by U.S. shale producers, estimated by consultants Rystad Energy at 300,000 barrels per day (bpd) for May and June, should help slow flows into tanks.
Additionally, regulators in the U.S. state of Texas, the country’s biggest oil producer, will hold a vote on May 5 on whether to enact output curtailments. Officials in the states of North Dakota and Oklahoma are also examining ways to legally allow output cuts.
Oversupply concerns dampened
- Storage concerns continue to weigh on markets with the International Energy Agency (IEA) warning that global capacity could reach its maximum by mid-June.
- The energy demand could slump by a record 6% in 2020 due to lockdowns.
- Nevertheless, WTI and Brent crude oil are rallying because of an easing of worries over rising U.S. stockpiles.
Report from Energy Information Administration (EIA)
According to the EIA, U.S. crude inventories grew by 9 million barrels last week to 527.6 million barrels, well below the 10.4 million-barrel rise analysts polled by Reuters had expected.
U.S. gasoline stockpiles fell by 3.7 million barrels from record highs the previous week, with a slight rise in fuel demand offsetting a rebound in refinery output.
Demand destruction pushes down the oil prices
Prices are likely to fall further this year even as countries begin to ease restrictions imposed to counter the viral outbreak and the output cuts by big producers will not fix the supply glut, a Reuters poll revealed.
The estimated shortfall this year is expected to be about 30 million bpd of demand. The impact of the coronavirus pandemic has obliterated demand with much of the world’s population still under some form of economic and social lockdown.
Gains are likely to be capped and selling pressure may resume over the short-run since the 30 million bpd plunge in demand is three times the size of the OPEC+ output cuts.
Prices could remain underpinned over the near-term, however, because of signs of a tightening of U.S. supply. Bullish traders and domestic oil companies are hoping this develops into a trend. Nonetheless, industry professionals would like to see more aggressive cuts in production by U.S. producers.
The smaller inventory builds should be noted but we’re going to need to see a continuation of this trend in the coming weeks to suggest the worst might be behind us. However, the reality is the already-stretched storage capacity is getting fuller and fuller every week, a rise in prices cannot be sustainable for long as the problem is not really resolved.
Weekly June West Texas intermediate crude oil
- The main trend is down according to the weekly swing chart.
- The market isn’t close to turning the main trend to up, but there is room for a normal 50% to 61.8% retracement.
- A trade through $6.50 will signal a resumption of the downtrend.
- The minor range is $34.04 to $6.50. Its 50% level at $20.27 is controlling the near-term direction of the market.
- The short-term range is $54.90 to $6.50. Its 50% level at $30.70 is the next upside target.
- The main range is $63.73 to $6.50. Its 50% to 61.8% retracement zone at $35.12 to $41.87 is the primary upside target.
A sustained move over $20.27 will indicate the buying is getting stronger. If this move is able to generate enough upside momentum then look for the rally to possibly extend into the resistance cluster at $29.73 to $30.70.
A sustained move under $20.27 will signal the presence of sellers. The first downside target is a steep downtrending Gann angle at $10.90. Crossing to the weak side of this angle will put the market in a bearish position with the next target $6.50.
Watch the price action and read the order flow at $20.27 all week. Trader reaction to this level will set the tone. The market could get bullish over $20.27 and extremely bearish under $10.90.
Did you subscribe to our daily newsletter?
It’s Free! Click here to Subscribe!