United States West Texas Intermediate Crude Oil Futures were up for a third straight session when closing out last week’s trading activity as major producers began output cuts to offset a slump in fuel demand triggered by the coronavirus pandemic, while reported data showed United States Crude Inventories grew less than expected.
Futures prices are now within striking distance of the close on April 20 which is the day 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 the historic break in crude oil just two weeks ago.
OPEC+ Production Cuts Began
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.
U.S. Firms Cutting Production
Traders are saying production cuts of almost 10 million bpd by OPEC and it’s allies or about 10% of global production, which is 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, are estimated at 300,000 BPD for May and June, should help slow the flow of excessive inventory into the reserve 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 and that 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 United States stockpiles.
It started late Tuesday last week with the release of the American Petroleum Institute (API) weekly inventories report that showed a smaller than expected build, and continued on Wednesday when the United States Energy Information Administration (EIA) reported numbers below forecasts.
According to the EIA, United States crude inventories grew by 9 million barrels last week to 527.6 million barrels, well below the 10.4 million-barrel rise analysts had expected.
United States 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 Will Continue to Weigh on 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.
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/or 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 United States supply. Bullish traders and domestic oil companies are hoping this develops into a worthy trend. Nonetheless, industry professionals would like to see more aggressive cuts in production by United States producers.
What we’re seeing in the futures market is most likely profit-taking and light short-covering. Storage capacity is getting close to overflowing, but at a slower speed so short-sellers are merely making adjustments.
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 still far from being resolved.
YEARLY Crude Oil Cycles
- The 10 year cycle makes a high on May 3 and then sells off sharply into May 25 after which it rallies from a major low.
- The 20 year cycle rallies sharply into May 19 then trades sideways into month end.
- The 30 year cycle rallies into May 14 then sells off into the end of the month.
- The 10 and 30 year cycles both head down from the 14th May.
Key turning point dates:
- May 4
- May 18
- May 29
MONTHLY Crude Oil Outlook ( JULY – CLN20 )
The mid $14.00 price area can absorb annual selling pressures. Above the $31.00 price area remains a several week target. Potentially the 57.00 price area is in reach over the next 3-5 months.
The $31.00 price area can likely absorb buying pressure throughout the balance of May. Once tested, the market is susceptible to falling back to key support at the mid $14.00 price area within several weeks.
On the other hand, a daily settlement above the $31.00 price area indicates a good annual low has been made. Then the $43.00 price area would be expected within several weeks and the $57.00 price area then attainable within several months, likely the high for the year.
A weekly settlement below mid $14.00 price area would likely yield a $5.00 price area retest within several weeks, the lowest price support presently found on any chart without revisiting negative price territories.
WEEKLY Crude Oil Outlook ( JUNE – CLM20 )
The main trend remains bearish according to the weekly swing chart. The market isn’t close to turning the main trend to bullish, but there is room for a normal 50% to 60% retracement. A trade through $6.50 will signal a resumption of the downtrend.
Based on last week’s price action, the direction of the June WTI crude oil market for this week-ending May 8 is likely to be determined by trader’s reaction to the pivot at the $20.00 price area.
Watch the price action and read the order flow at the $20.00 price area all week. Trader’s reaction to this level will set the tone. The market could get bullish over the $20.00 price area and bearish under the $11.00 price area.
A sustained move over the $20.00 price area will indicate the bulls are 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 the $30.00 price area.
A sustained move under the $20.00 price area will signal the presence of bears. The first downside target is a steep downtrending angle at the $11.00 price area. Crossing to the weak side of this angle will put the market in a bearish position with the next target the $6.50 price area.