There seemed to be an increase in volatility for oil prices since last week’s report. In the current report, we intend to have a look at the state of the US oil market, the role of the USD in determining oil prices, the possible implications following OPEC+’s meeting on Sunday and the possible threat to oil prices should Russian oil refineries continue to be struck by Ukrainian forces. To conclude the report we will also provide a technical analysis of WTI’s daily chart.
Slack in demand from the US oil market
We start our analysis of the US oil market by having a look at the release of the Baker Hughes oil rig count. The release indicated that the number of active oil rigs in the US has decreased by a figure of one, which may imply that demand for oil has decreased. Furthermore, on Wednesday, the API weekly crude oil inventories figure, showcased an increase of 4.052 million barrels, which when compared to the expected figure of -1.9 million barrels, is significant.
Moreover, the weekly EIA crude oil inventories figure also came in much higher than expected at 1.233 million barrels versus the expected drawdown of -2.100 million barrels. The reversal from a drawdown in inventories last week, to an increase in oil inventories, may imply that demand for oil from US consumers over the past week has decreased. In conclusion, the apparent decrease in demand for oil from US consumers over the past week may have weighed on oil prices.
US Employment data tomorrow
Another issue we would like to address is the release of the US Employment data for May, which is due out on Friday. The US Employment data and in particular the Non-Farm Payrolls figure, acts as a gauge for the resilience of the labour market in the US.
The current expectation by market participants is for the Non-Farm Payrolls figure to come in at 185k, which would be an increase from last month’s 175k figure. Therefore, should the figure come in as expected or higher, it could increase pressure on the Fed to maintain their current interest rate levels steady, which in turn could maintain the tight financial conditions surrounding the US economy.
Therefore, should tight financial conditions remain within the US economy, it could weigh on oil demand and thus may weaken oil prices. In conclusion, should the US Non-Farm Payrolls figure come in as expected, or higher it could weigh on oil prices, whereas should the NFP figure come in lower than expected, it could provide support for oil prices.
OPEC+ meeting proves fruitful for Oil bears
We make a start with our OPEC comment by noting that the group of oil-producing economies met on Sunday. The cartel as was expected, announced a rollover of the existing production for the remainder of the year. However, the highlight of the meeting was the announcement that the 2.2 million barrels per day cut, will be “gradually phased out on a monthly basis until the end of September 2025”. Thus, with the announcement that the cartel’s voluntary oil production cuts will be slowly phased out, which may lead to oil supply exceeding demand, oil prices moved lower following the announcement.
However, we should note that OPEC+ did also note that the monthly increase of oil barrels into the global market can be “paused or reversed subject to market conditions”, implying that in the future should oil prices fall to levels deemed undesirable by the cartel, we may see temporary oil production cuts in order to support the price of oil.
Nonetheless, we maintain our hypothesis that the future phasing out of the oil production cuts, may have been in order to bridge the gap that appeared to have emerged between the UAE, Iraq, Kuwait and Algeria with the rest of the group.
Russia-Ukraine
The war between Russia and Ukraine has been raging on and may be about to once again influence the oil markets. In particular, we are referring to the recent development upon which Ukraine according to various media outlets, has been granted permission to use American-provided weapons to strike targets in Russia. Prior to this development, Ukraine was prohibited from striking within Russian territory using weapons supplied by the USA.
The most recent development could allow Ukraine to continue its campaign against Russian oil refineries which it perceives, have been financing Russia’s war economy. In turn, a continued campaign against Russian government revenue, could hinder their ability to continue financing the ongoing war.
Thus, should more oil refineries be struck with Ukraine’s now increased capability, it may hamper global oil supply which in turn could lead to an increase in oil prices. Yet for now the most recent strikes do not appear to have significantly impacted the liquid gold’s price.
Technical Analysis
WTI Cash Daily Chart
- Support: 71.50 (S1), 66.95 (S2), 61.67 (S3)
- Resistance: 76.55 (R1), 81.80 (R2), 85.85 (R3)
WTICash appears to be moving in a downwards trajectory, with the commodity’s price having broken below our support now turned to resistance line at the 76.55 (R1) level. We switch our sideways bias, in favour of a bearish outlook and supporting our case is the aforementioned breaking below our support now turned to resistance line, in addition the downwards moving trendline which was incepted on the 5th of April.
Moreover, the RSI indicator below our chart currently registers a figure below 40, implying a strong bearish market sentiment. We would like to note that the Bollinger bands appear to have widened which may imply an increase in volatility and thus may warrant caution for oil traders in the upcoming week. Nonetheless, for our bearish outlook to continue, we would require a break below the 71.50 (S1) support level, with the next possible target for the bears being the 66.95 (S2) support line.
On the flip side, for a bullish outlook we would require a clear break above the 76.55 (R1) resistance line, with the next possible target for the bulls being the 81.80 (R2) resistance level. Lastly, for a sideways bias we would require the commodity to remain confined between the sideways moving channel defined by the 71.50 (S1) support level and the 76.55 (R1) resistance line.
