Crude oil: 4 factors keep outlook bullish for WTI; check near-term strategy

Crude oil price outlook: WTI short term resistance is at $82 for the day, while short term trading range should be in range of $77-$82

Crude oil retreats from two month high on US interest rate worries  

Crude oil prices have retreated in Asian market hours to trade near support of $79/b on Thursday, a day after trading near two months high of $80.60 on Wednesday. The price could not sustain at higher levels as the US market witnessed sharp sell-off in late evening on worries that higher interest rates will dampen the economic expansion. The Dollar index climbed 0.5 per cent to trade above 105 levels while the WTI July futures settled lower by 0.8 per cent at $79.23/b on Wednesday. 

On the other hand, China's onshore Yuan weakened to lowest level of 7.24 against the Dollar, its lowest since November. This could see some pressure on commodity prices in today's session as China is the largest buyer of most of commodities in the world and weakening of currency could hurt the importers.

Although Oil prices initially strengthened this week amid the renewed geo-political risks surrounding Israel-Hamas while the Houthis have carried out another attack on a commercial vessel in the Red Sea, the consensus is building over Opec+ extending their prevailing policies to end of this year, adding to the bullish momentum. 

Opec+ is holding back 5.9 million barrels per day of production, or 6 per cent of global supplies, through its output cut policies in order to keep the global oil market in balance. Opec is expecting demand to grow by 2.25 mbpd in 2024. The latest report of April showed that the cartel group's crude production fell 240 kbpd m/m to 34.16 mbpd in April from 34.41 mbpd of March. However, the group has over produced the quota limit of 33.97 mbpd by 190kbpd. Opec all members' supply in April fell by 48k b/d month-on-month to 26.58m b/d, while Opec + supply fell by 246k b/d M-o-M 41.02m b/d. 

Russia has admitted that it had failed to fully comply with its Opec+ production targets citing technical difficulties of cutting production in the winter, with Opec putting the country’s output level at 9.29 million b/d in April.  

Meanwhile, the US weekly crude inventory data was delayed by a day as Monday was a US holida. We are seeing recovery in Gasoline demand which reached above 9mbpd last week, its highest level since November last year. The US government agencies are warning of higher-than-usual hurricane activity this year as warm sea temperatures and falling wind shear conditions could result in seven major hurricanes in the season beginning June 1, more than double than last year's three hurricanes. This could be challenging for the US energy producers in the Gulf region, as it accounts for 12-15 per cent of US crude oil production in.

The American Petroleum Institute reported a larger draw of 6.5 million barrels of crude inventories from commercial US reserves, gasoline stockpiles fell by 452,000 barrels, while distillate inventories increased by 2.0M barrels.  The inventory data pointed towards a pick up in demand from the start of the US summer season, which usually marks at least two months of elevated demand in the world’s biggest fuel consumer.

Outlook: We remain bullish on oil prices in the short-term as we expect expansion in manufacturing activities in China, strong gasoline demand from the US and European countries in upcoming summer season, the warning of above normal hurricane season in US, along with rolling of Opec+ production cuts policies to the end of year can in their June-2 meeting, to keep WTI sustaining above $80 in short term.   

WTI short term resistance is at $82 for the day, while short term trading range should be in range of $77-$82. We advise buying on dip strategy in the counter.

WTI Crude oil Jul: Support: $77, Resistance: $82

MCX Crude June: Support: 6,450, Resistance: 6,750

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Disclaimer: Mohammed Imran is a Research Analyst at Sharekhan by BNP Paribas. Views expressed are personal.