Oil Prices Underpinned By Supply Jitters

U.S. West Texas Intermediate crude oil futures are up over 3% for the week with most of the gains attributed to the European Commission’s decision to place an embargo on Russian crude oil. This move is perceived as bullish because it lowers the available supply.

Demand is still a concern due to China’s COVID-related shutdowns, but conditions seem to be holding steady, which brings the country closer to gaining control of the situation and perhaps lifting restrictions sooner than expected. Nonetheless, the lockdowns have taken their toll on the economy, especially the services sector.

This week’s American Petroleum Institute (API) and U.S. Energy Information Administration (EIA) weekly inventories report offered mixed results but they continued to highlight Europe’s strong demand for U.S. refined products, especially distillates.

Prices Underpinned by Supply Jitters

Crude oil prices are up this week due primarily to the release of the European Union’s plans for new sanctions against Russia, including an embargo on crude in six months.

The sanctions proposal, which needs unanimous backing by the 27 EU countries, also includes phasing out imports of Russian refined products by the end of 2022, and a ban on all shipping and insurance services for the transportation of Russian oil, according to Reuters.

Reuters also reported the French environment and energy minister, Barbara Pompili, said she was confident European Union member states will reach a consensus on sanctions by the end of this week.

China’s COVID-19 Lockdowns Weigh on Services Sector

China continues to lockdown parts of its economy as it battles an outbreak of COVID-19. Although there has been evidence of a slowdown in the spread of coronavirus, officials are keeping current restrictions in place.

Over the weekend, China’s manufacturing PMI came in lower than expected. On Wednesday, a report showed China’s services sector activity contracted at the second-steepest rate on record in April. Traders blamed tighter COVID curbs for the weakness in the industry that led to sharper reductions in new business and employment.

The combination of the two weak PMI reports is putting pressure on demand. The problem with this scenario is that no one knows when the lockdowns will end so trader worries are open-ended.

Mixed Energy Information Administration Report adds to Trader Confusion

Traders looking to get some guidance from the government’s weekly inventories report were probably disappointed when the EIA reported U.S. crude oil stockpiles rose unexpectedly last week, while distillate and gasoline inventories dropped.

However, this outcome could be explained. U.S. crude supply likely rose because the government continued its release of oil from its Strategic Petroleum Reserve. As a result, crude stocks at the key Cushing, Oklahoma, storage hub rose by 1.4 million barrels in the week, even as production held steady at 11.9 million bpd, the EIA said.

Meanwhile, distillate and gasoline inventories dropped again as refiners continue to boost fuel exports to a world in need of supply. Russia’s invasion of Ukraine, and subsequent moves by the United States and allies to curtail imports of Russian oil, has tightened supply worldwide. That has boosted interest in U.S. refined products exports.

OPEC+ Sticks to Modest Oil Output Hike Despite Price Rally

In fundamental news, OPEC+ agreed on Thursday to another modest monthly oil output increase, arguing that the producer group could not be blamed for disruptions to Russian supply and saying China’s coronavirus lockdowns threatened the outlook for demand, Reuters reported.

Ignoring calls from Western nations for accelerating output hikes, the group agreed to raise its June production target by 432,000 barrels per day, in line with an existing plan to unwind curbs made in 2020 when the COVID-19 pandemic hammered demand, according to Reuters.

The news was well-telegraphed and essentially shrugged off by traders.

Weekly Technical Analysis

Weekly June WTI Crude Oil

Trend Indicator Analysis        

The main trend is up according to the weekly swing chart. The big change this week is that momentum shifted back to the upside after trending lower since the week ending March 11.

A trade through $121.17 will negate any bearishness in the market, while signaling a resumption of the uptrend.  A move through $61.48 will change the main trend to down. This is highly unlikely, however.

The minor trend is up. The uptrend was reaffirmed when buyers took out $109.20 this week. A trade through $95.28 will change the minor trend to down. A move through the minor top at $113.51 will also be a sign of strength.

Retracement Level Analysis

The major resistance remains the longer-term retracement zone at $111.45 to $136.92.

The first minor range is $121.17 to $90.37. Traders are currently testing its retracement zone at $105.77 to $109.40. Overtaking $109.40 will put the market in a bullish position.

The second minor range is $90.37 to $113.51. Its 50% level at $101.94 is currently acting as support.

If $101.94 fails as support then we could see an acceleration to the downside with the retracement zone at $91.33 to $84.28 the next target.

The main range is $33.00 to $121.17. If $84.28 fails as support then look for the selling to extend into its retracement zone at $77.09 to $66.68.

Weekly Technical Forecast

The direction of the June WTI crude oil market the week-ending May 13 will be determined by trader reaction to $109.40.

Bullish Scenario

A sustained move over $109.40 will indicate the presence of buyers. If this move creates enough upside momentum then look for a retest of the minor top at $113.51. This is a potential trigger point for an acceleration into the contract high at $121.17.

Bearish Scenario

A sustained move under $109.40 will signal the presence of sellers. If this move creates enough downside momentum then look for a quick test of the 50% level at $105.77, followed by another 50% level at $101.94

A failure to hold $101.94 will indicate the selling pressure is getting stronger. This could trigger a break into a support cluster at $95.28, $92.60 and $90.37.

Taking out the minor bottom at $90.37 could trigger an acceleration into the Fibonacci level at $84.28.  

Short-Term Outlook

The price action suggests that the EU moving closer to a ban of Russian oil is offsetting concerns over a loss of demand from China. The move is expected to tighten supply even further.

“There is one million barrels a day of Russian crude off the system today…We think that will probably double this month, when existing sanctions come into effect,” BP Chief Executive Officer Bernard Looney said earlier in the week.

This increase in the supply loss combined with the expected drop in demand from China is likely to keep prices underpinned over the near-term.

Meanwhile, the technical picture essentially indicates strength over $109.40 and weakness under $101.94.