Oil prices have rebounded from their recent lows and hopefully the worst is now over. The oil market appears like it may have already turned the corner. Perhaps we are in the inflection right now as we speak.
Prices recovered faster than many were forecasting due to lower-than-expected supply coupled with better-than-expected demand.
Data from the United States Energy Information Administration on Wednesday showed that the United States production is now 1.5 million barrels per day below its March all-time high level of 13.1 million BPD.
Beginning May 1, OPEC and its oil-producing allies took 9.7 million BPD offline, and on this past Monday Saudi Arabia, the group’s leader, said it would scale back production further in an effort to boost prices. The EIA’s data also showed that gasoline demand is beginning to recover as states start to ease shelter-in-place restrictions.
In April, May’s expiring West Texas Intermediate crude oil contract plunged below zero and into negative territory for the first time on record, but prices have since recovered and on Thursday the contract for June delivery traded around $26. Brent crude, the international benchmark, traded around $30.
By the end of 2021, WTI could be trading as high as $60, and Brent as high as $65, but there is some caution warranted. In order for the market to rebalance there needs to be a continued drawdown in inventories, and the production that has already come offline needs to stay offline for at least a sustainable period of time.
As we emerged from lockdown we got an immediate pop exhibited in this week’s trading.
Despite WTI’s rebound, prices are still about 60% below the January high level of the mid $65.00 price area, which has pressured producers as companies struggle to break even. Once demand catches up and producers look to adding supply again, access to capital markets will likely be limited.
Most investors have had enough of the energy sector. They already had enough going into this, and if they hadn’t had enough before they’re unlikely to be interested this time around. What that tells you, when they need to grow production they’re going to have to grow it out of cash flow, which means we’re going to see higher prices in the pipeline.
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 $12.00 price area can absorb annual selling pressures. Above the $29.00 price area remains a near term target. Potentially the mid $55.00 price area is in reach over the next several months.
The $29.00 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 $12.00 price area within several weeks.
On the other hand, a daily settlement above the $29.00 price area indicates a good annual low has been made. A daily settlement above the $41.00 price area would then be expected within several weeks and then the mid $55.00 price area would be attainable within several months, likely making the high for the remainder of the year.
A weekly settlement below the mid $12.00 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 is bearish according to the weekly swing chart, but the closing price reversal bottom from the week ending May 1 and its subsequent confirmation, helped shift momentum to the upside.
The actual main trend will change to bullish on a trade through the last main bottom at $54.86. This is highly unlikely, however, there is room to the upside for the market to complete a normal 50% to 61.8% retracement.
A trade through $17.27 will negate the closing price reversal bottom and signal a resumption of the bearish trend.
The minor trend is also bearish. A trade through $35.18 will change the minor trend to bullish. This will confirm the shift in momentum to bullish. The minor range is $37.64 to $17.27. Its 50% level at $27.46 is providing resistance. This price level is also controlling the short-term direction of the market.
The short-term range is $54.86 to $17.27. Its 50% level at $36.07 is the next potential upside target. The main range at $40.11 to $45.50 is the major upside target.
Based on last week’s price action, the direction of the July WTI crude oil market the week-ending May 15 is likely to be determined by a downtrending Gann angle at $26.95.
A sustained move over $26.95 will indicate the presence of buyers. This could lead to a labored rally with targets including a 50% level at $27.46, followed by another downtrending Gann angle at $30.86. This is a potential trigger point for an acceleration to the upside with the next target a 50% level at $36.07.
A sustained move under $26.95 will signal the presence of sellers. The first target is a minor pivot at $22.93, followed by the reversal bottom at $17.27.
In order to generate the momentum needed to drive this market away from the late April bottom, the buying is going to have to be strong enough to overcome the pair of downtrending Gann angles at $26.95 and $30.86.