What is our trading focus?
OILUKAUG20 – Brent Crude Oil (August)
OILUSJUL20 – WTI Crude Oil (July)
XOP:arcx – Oil & Gas Exploration & Production
XLE:arcx – Energy Select Sector SPDR Fund (Large-cap US energy stocks)
Crude oil’s behavior following the agreement by OPEC+ members to extend the 9.7 million barrels/day production cut until end July, could be signaling the beginning of an overdue consolidation phase. With WTI and Brent crude oil almost having closed the gaps established after the March 6 collapse, when Saudi Arabia began their price war, the question is how much further the price can climb without additional improvements in the fundamental outlook.
Challenging the current price is the risk of non-compliance from members of the OPEC+ group, the risk to demand from renewed flareups in Covid-19 cases and reports that US shale oil producers are already preparing to increase production. Adding to this the risk of how the OPEC+ group, now holding a vast amount of spare capacity, will manage to return supply to market without adding too much too soon.
The July WTI contract managed to retrace 50% of its Covid-19 and Saudi price war related sell-off to reach $40/b, now resistance. With support at $35/b the risk of a 10 to 15% correction has emerged. Hedge funds have been strong buyers of WTI crude since early March with the net-long reaching 380 million barrels in the week to June 2, the largest bullish bet on WTI crude oil since August 2018. While the prompt spread contango has almost disappeared, currently at 25 cents/b compared with $3.5/b on April 28, the temptation to book profit may also weigh on crude oil’s short-term outlook.