WTI has bounced sharply to rise 2% and above 80 again, reversing a big chunk of its losses from earlier in the week. It looks like short-covering, OPEC+ supply cuts, dovish BoJ and mostly stronger US data today are all helping to fuel the rally and supporting the crude oil outlook.
Earlier this week, both oil contracts slumped to finally close their price gaps that were formed at the start of the month when the OPEC+ agreed to cut oil production significantly in a surprise decision. With the gaps now closed, can oil stage a big comeback? I wouldn’t bet against, even if recession concerns might be on the rise. While I am waiting for a technical reversal signal for confirmation, fundamentally my crude oil outlook is bullish.
Why had oil prices fallen?
Crude oil had come under pressure due to a handful of reasons in recent weeks. These include...
• Concerns about recession and therefore weaker demand causing investors to largely ignore the upside risks stemming from the OPEC+ deal.
• Secondly, may traders have undoubtedly booked profit on their long positions after prices formed those big breakaway gaps at the start of the month. By squaring their positions, they effectively sold oil at the market, thus creating downward pressure.
• Thirdly, a lot of would-be buyers on the futures markets have probably stayed on the side lines, waiting for the gaps to close, as they often do. So now that this condition has been met, watch out for signs of a bullish reversal.
• Finally, it looks like Russia might not be complying with the OPEC+ cuts completely. An average of 3.4 million barrels of oil per day were flowing from Russian ports, unchanged after the previous week’s recovery, according to tanker-tracking data compiled by Bloomberg.
Crude oil outlook: What factors are supporting oil rally?
It is usually the supply side of the equation that often matters when it comes to determining the crude oil outlook and prices. On this front:
• US crude oil stocks have been falling in recent weeks, suggesting higher demand from refineries. This is usually supportive of prices. Official EIA data showed another big 5.1m barrel decline this week.
• Following the OPEC’s surprise decision at the start of the month to cut oil production unexpectedly by nearly 1.7 million barrels per day, this is going to start impacting the physical market soon. Assuming there won’t be any demand-side shocks in the meantime, and supply compliance remains near 100% among the OPEC members, the market should tighten significantly, providing good support behind oil prices.
• Non-OPEC supply will increase over time and reach pre-covid levels. However, the negative of this on oil prices will be a longer-term issue. Last year the US produced an average of 11.9 million barrels of oil per day, just below the record average of 12.3 million bpd set in 2019.
WTI outlook: Technical Analysis
WTI moving above Thursday’s bullish candle shows there is now some confirmation that the low might be in. It still needs to reclaim $76.50 – an area of prior support, now potential resistance.
If it manages to do that and climb well above $76.50 then it will have formed a three-bar reversal formation on the daily time frame, which would point to follow-up buying in the week ahead.