Marius Paun | London, UK | Senior dealer | Wednesday, 27th May 2020
West Texas Intermediate crude prices continued to rise in the last few weeks albeit at a slower pace, supported by lower US oil inventories and growing confidence among investors in OPEC as well as US producers’ ability to slash output. At the same time, there are ongoing signs that fuel demand is picking up with more cars on the road and industries gradually reopening following coronavirus lockdown ease. As evidence of the recovering fuel demand, the US airlines have reported slower ticket cancellations and even an improvement in bookings.
The top producers Saudi Arabia and Russia, the two pillars of OPEC+, may have had a bit of a row officially, but also may have fancied their chances of attempting to bankrupt those ‘annoying’ US shale drillers. Consequently, they both pumped as if there was no tomorrow, possibly thinking they could acquire extra market share in the process. Good plan or not, by April every major player was feeling the pain. Especially Saudi Arabia, who can produce crude very cheaply, but in reality, both players, need a much higher price to support their public spending and keep the population happy.
It’s true the pandemic might not have been part of the ‘original understanding’ between the two but now things were starting to go seriously wrong, so something needed to be done. In April they agreed to cut their collective output by 9.7 million barrels per day for the next two months. They are also scheduled to meet again in early June to maintain the cuts which are still 40% down for the year. What might have prompted better compliance this time from a notoriously uncompliant cartel? It appears that by mid-May OPEC+ has already cut oil exports by over 6 million barrels which were seen as a strong start to complying. Furthermore, the Saudis have made even deeper cuts to their promises by announcing a ‘voluntary’ extra slash in production last week. Crikey, even Iran agreed to cuts.
Funny enough Reuters reported that ‘Russia overtook Saudi Arabia as China’s top crude oil supplier in April with imports rising 18% from the same month a year earlier as refiners snapped up cheap raw materials amid a price war between the two producers’. Russian shipments reached 7.2 million tonnes in April compared with 1.49 million in April 2019 and 1.66 million barrels as recently as March this year. While supplies from Saudi Arabia fell to 1.26 million BPD, down 1.53 million BPD in April 2019 and 1.7 million BPD in March. Whoops……that must have hurt. Despite the Covid-19, Chinese oil imports during the first four months of the year were up 1.7% compared with the same period in 2019 as crude refineries tried to take advantage of slumping prices.
Across the Atlantic, the US shale and Canadian tar sands producers have done their bit, cutting back on spending and exploration as well as shutting down existing wells. It appears the number of active drilling rigs in the US is at its lowest in almost five years. The Baker Hughes rigs count indicated a record low of 318 in the week to May 22nd. We’re starting to see fresh speculation that due to the recent rally in oil prices, shale producers’ rate of decline could begin to slow and some are even confident that it could reverse sooner rather than later.
In another sign the oil supply glut is easing, the US crude inventories fell 5 million barrels during the count of two weeks ago despite expectations for an increase. The data for last week will be out tomorrow, a day later than usual due to the Memorial Day bank holiday on Monday.
The chart above shows the short-term moving averages still sitting above the longer-term moving averages even allowing for today’s drop from $34.42 to $32.93 currently. However, it seems the short-term MA (6 days) starts to point downwards and the price is now below the indicator which is both bearish signals. It remains to be seen if that’s just consolidation or the rally-back has run its course for now and a resumption in the downtrend will follow.
On the upside, bulls would need to see a close above resistance at $34 first. That would bring into focus the 50 % Fibonacci retracement at $36.6. As we mentioned before, the gap of the 9th of March when US crude prices fell from $41.08 the low of the previous session, to reopen at $32.72 on the next day, is keeping the bulls hopeful it will be filled sooner rather than later.
On the downside, bears will have their eyes on breaching support around $31.6 mark first. A close below that level could attract additional sellers who will challenge $30.6 good resistance turned support. 38.2% Fibonacci retracement around $30.00 mark is next in line.