Some optimism has returned to the oil market in recent weeks. In particular, from a price action perspective, oil has tested and rallied from a key level ($58.5/barrel on 5th May). That price was initially reached on 9th April, shortly after Trump’s ‘Liberation Day’ announcement (FIG 1). There is, therefore, an argument that oil prices are building a base, despite fading momentum in recent weeks (FIG 1).
Newsflow has also been encouraging. China has increased policy loosening; unplanned supply outages remain elevated (i.e. outside of OPEC, see FIG 3); and this weekend OPEC+ kept its plans to increase supply by 411k bpd in July (despite expectations for a larger increase). Oil prices therefore opened higher this morning (by ~3.0%*). Elsewhere some OPEC policy makers have hinted at higher prices (e.g. Kazakhstan's Energy Minister, who said last Thursday that oil prices above $70-$75/barrel is likely to be suitable for ‘all countries’). Various medium term models also carry a positive message. Net LONG positioning, for example, is low (FIG 2); measured sentiment is bearish; and some technical indicators have recently generated BUY signals. That supports the case for base building.
Ultimately, though, oil price direction will be driven by the trend in global oil inventories (i.e. the global supply and demand balance). Currently, in that respect, OPEC is reversing its voluntary production cuts rapidly – despite a backdrop of softening US and global growth. ‘Fundamentals’ therefore remain poor. At a minimum, a retest of the early May/early April lows is therefore likely (see our latest oil market analysis for detail).
FIG 1: Brent futures, shown with 50 & 200 day moving averages (US$/barrel)
*concerns about a re-escalation in the Russian-Ukrainian conflict, following this weekend’s Ukrainian attacks on Russia, are also likely adding to the upward oil price pressure this morning.
FIG 2: Brent oil net speculative LONG/SHORT positions vs. oil price (US$/barrel)
FIG 3: Unplanned supply outages (non-OPEC producers, mbpd)
