Oil Outlook Remains Clouded

|3 months ago

Crude oil prices struggled to recover from the sharp sell-off that has sent a barrel of West Texas Intermediate to $42.05 a couple of weeks ago, down almost 20% from its peak of May 25th. However, since June 21, the WTI was able to recover marginally thanks to a weaker US dollar and reassessment of the fundamentals by investors. From a technical standpoint, the WTI’s sell-off has been stopped by the key support at around $42 (multi lows) and is currently retracing toward the $46.00-50 resistance area (Fibo 38.2% on April-June sell-off and previous highs). 

Overall, it seems that investors are negatively skewed about the oil outlook as even the recent political turmoil in the Middle East – several countries cut their diplomatic ties with Qatar, a major oil and gas producer in the region – was unable to stop the debasement in crude oil prices. In addition, the sustained contraction in US crude inventories seems to have no effect either. Despite a marginal increase last week (+118k barrels), US stockpiles (excluding strategy reserves) have been decreasing continuously since the end of March this year, sliding from 535mio barrels to 509mio as of June 23rd. 

Market participants have lost faith in OPEC’s ability to drive prices as several of its members (mostly Iraq) failed to comply with the deal and did not cut production sufficiently. In addition, Iran declared it had increased the capacity of its main oil terminal, which tends to indicate that the world’s fifth largest oil producer is willing to inch up production. Finally, according to the EIA, the US had more than doubled its exports of crude oil and petroleum products over the last six years as exports restrictions were lifted. Furthermore, the US shale industry continues to optimise production and cut costs.

On the medium to long-term we remain cautious on the oil outlook as
the fundamentals do not support upside gains. However, in the shortterm,
crude oil prices have room to recover somewhat, thanks to a weak
dollar and the end of the panic selling. We expect crude oil to return
gradually toward the $50 threshold as fears ease.

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