OPEC+ meeting takes center stage in crude oil market

In our latest update we highlighted how the “buy-side” interest across five major crude oil and fuel futures contracts had fallen to the lowest level in more than ten years. And despite seeing a 12% increase to 384k contracts in the latest reporting week to May 23, driven by an increase in the Brent net long and short covering in gas oil, the total remains 43% lower compared with this time last year. Inadvertently a situation that is now likely to provide some added tailwind through the rebuilding of long positions once the technical and/or fundamental outlook becomes more price friendly

In the short term, however, the market will continue to focus on the negative impact of China economic weakness, recession risks elsewhere and uncertainties regarding the direction of US short term rates, and with that the level of the dollar. Failure to deliver some price supportive action at the OPEC+ meeting this weekend could see oil prices drop further, but overall, we see the downside risk as limited with last month’s production cuts yet to be fully felt and priced in. 

The overall sentiment among analysts is heavily leaning to a tightening crude oil market during H2 with OPEC’s own data indicating that global oil demand will exceed supplies by an average of roughly 1.5 million barrels a day in the second half of the year. In China meanwhile the market has been focusing on weak economic data while largely been ignoring near record refinery runs and strong imports. A sustained high run rate in the coming months may eventually help change that negative sentiment. 

Brent crude oil, for now, remains stuck in the $70’s, and in order to change that while sending a signal a low in the market the psychological $80 level needs to be challenged and broken first. Until then the market is likely to remain rangebound with a short-term risk, as mentioned, of a break lower should OPEC not send a signal of strong support.