WTI Rally at Risk Ahead of This Week’s Crucial OPEC+ Summit

Last week’s surge was driven by optimism around an immediate, coordinated supply cut, so if the perceived odds of such a move fall, oil could fall...

Energy 5

Global stock markets are rallying today on tentative signs that hotspots like Italy, Spain, and New York City may be turning the corner in their fight against COVID-19, but that optimism isn’t extending to the oil market. While the sharp contraction in demand for crude oil has played a role in the price collapse over the course of the year so far, the far bigger story is on the supply side of the equation.

In that vein, news that oil producers would meet to discuss supply cuts this week drove oil prices nearly 45% higher in the latter half of last week alone. However, news that summit will be delayed until Thursday, reportedly due to discord between Saudi Arabia and Russia as well as a lack of commitment from U.S. companies about output cuts, is driving oil prices down more than -6% so far today.

Like all commodities, there are mechanisms that drive the oil market toward equilibrium over longer timeframes. If the spigots remain open and prices remain low, higher-cost producers will eventually be driven out of business, reducing supply. Meanwhile, the low prices may also incentivize consumers and businesses to use more oil as the global economy recovers from the COVID-19 disruption, raising demand. That said, last week’s surge was driven by optimism around an immediate, coordinated supply cut, so if the perceived odds of such a move fall, oil could quickly retrace last week’s gains as traders bunker down for a longer period of a global supply glut.

From a technical perspective, West Texas Intermediate (WTI) oil has recovered to its 21-day exponential moving average for the first time since late February. The short-term trend remains definitively bearish at the moment, though a triple bullish divergence in the daily RSI indicator suggests that selling pressure has been receding on each of the last three lows, though bulls may want to wait for a successful retest in the low-$20s before growing more optimistic:

Source: TradingView, GAIN Capital

For now, the path of least resistance for oil remains lower until we get a comprehensive supply cut from major global producers.

More from Crude Oil

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Open an Account