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Crude Oil: Opposing drivers make short-term outlook very uncertain
Ole Hansen
Head of Commodity Strategy
Summary: Trying to make a short-term prediction for crude oil at this stage is close to impossible. Increasingly supportive supply fundamentals have been countered by a deteriorating technical chart setup and the US-China trade related weakness. But with geopolitical and supply risks continuing to build it will take a very brave soul to go outright short the market now.
Below we have highlighted some of the current factors which are helping to create a very confusing outlook for oil.
Supporting crude oil drivers:
– Tightening markets due to voluntary and not least involuntary production cuts.
– This tightness is reflected in the rising backwardation in Brent despite weak prompt prices.
– Russia’s pipeline contamination, cutting supplies to Europe
– Iran’s threat to stop observing restrictions on uranium enrichment
– US moving aircraft carrier to Middle East on credible Iran threat
– Record imports last month from China, the world’s biggest buyer
– Fighting around Tripoli, Libya’s capital, raising risk to supplies from Opec’s most volatile producer
Non-supportive drivers:
– Risk of failed US-China trade talks prompting a global economic slowdown
– Stock market weakness and surging VIX reducing general risk appetite
– Hedge funds caught on the wrong side following the recent correction
WTI crude oil touched $60/barrel and the bottom of the current channel on Monday. Using Fibonacci retracement levels the next level of support can be found at $57.3/b ahead of $54.5/b.
Supporting crude oil drivers:
– Tightening markets due to voluntary and not least involuntary production cuts.
– This tightness is reflected in the rising backwardation in Brent despite weak prompt prices.
– Russia’s pipeline contamination, cutting supplies to Europe
– Iran’s threat to stop observing restrictions on uranium enrichment
– US moving aircraft carrier to Middle East on credible Iran threat
– Record imports last month from China, the world’s biggest buyer
– Fighting around Tripoli, Libya’s capital, raising risk to supplies from Opec’s most volatile producer
Non-supportive drivers:
– Risk of failed US-China trade talks prompting a global economic slowdown
– Stock market weakness and surging VIX reducing general risk appetite
– Hedge funds caught on the wrong side following the recent correction
WTI crude oil touched $60/barrel and the bottom of the current channel on Monday. Using Fibonacci retracement levels the next level of support can be found at $57.3/b ahead of $54.5/b.
Despite the first weekly price drop in five weeks and an ugly, bearish weekly candle, Brent crude continued to be bought during the week to April 30 with the rising backwardation attracting buyers amid supporting fundamentals. WTI bulls, meanwhile, backed off and cut longs for the first time in 10 weeks in response to rising crude oil production and stocks at their highest level since September 2017.
Next up the “Weekly Petroleum Status Report” from the EIA at 14:30 GMT. A third consecutive weekly rise in crude oil and a dip in product stocks are the current expectation. I will post charts, tables and comments on Twitter @ole_s_hansen once the report is out.
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