Crude oil prices turned positive, erasing earlier losses of around 2.5%, to make the short-term crude oil outlook more neutral-to-slightly positive.
In what looks like a short-covering rally, WTI bounced from a base of $74.65ish to rise above $76.00, making back more than $1.50 worth of losses from earlier in the day.
You can’t call it a ‘delayed’ reaction to this weekend’s surprise from Saudi Arabia as prices did initially gap higher, before slumping. Perhaps traders are thinking twice about shorting oil, after Saudi took the matters into its own hands.
After threatening short sellers will be ‘ouching’ last month, Saudi has followed through on its warning by voluntarily cutting its oil output by a million barrels a day from July.
However, it is not the first time we have seen this sort of price action only for the rally to run out of steam.
The market needs some assurance that the other cartel members won’t be taking advantage of Saudi and will be complying fully. Russia could be the main culprit, as Moscow needs to sell as much oil as it can to finance its ongoing war in Ukraine.
Crude oil outlook: downside risks limited
I imagine speculators’ shorts bets will be trimmed with time or because of price action, anyway. The more time elapses, the tighter the market will become, as the OPEC+ cuts filter through.
As a reminder, the group announced in April that it would cut production by an additional 1.1 million barrels per day until the end of this year, adding to the big cuts announced in November of last year. They have now extended those cuts until the end of 2024.
Given that crude oil demand is price-inelastic, as it is a supply-driven market, we are looking at a much tighter market as we move into H2 and beyond. That’s unless demand elsewhere absolutely collapses (like Covid-like lockdown), we see non-compliance from big OPEC+ producers, or there a big upsurge in non-OPEC supply. All of these scenarios seem unlikely to me.
Crude oil outlook: Technical analysis on WTI
With WTI storming back to turn positive on the day, albeit without much further upside follow-through, this has reduced oil’s bearish characteristics, adding to the recent signs of stabilization.
The bulls will now want to see WTI close above Monday’s low at $71.75 as that would put the bears, who sold oil on the back of Monday’s “gravestone doji” pattern, in a spot of bother. If that happens, we could then see a quick move up to a new high on the week above $75.00 to take out liquidity from those trapped bears.
However, if oil holds below Monday’s low then the bulls must await further price action before pouncing.
-- Written by Fawad Razaqzada, Market Analyst