Crude oil strategy for May 28: WTI futures eye breakout above $80 hurdle

Crude oil outlook and strategy: Analyst at Sharekhan believes buying WTI crude on correction would be a good strategy for the day

Renewed geo-political risk and Opec+ optimism drives crude oil higher 

Crude oil prices started on a firm foot this week on renewed geo-political worries after the death of an Egyptian soldier in a clash with Israeli troops, alongside growing optimism of Opec+ extending their production to end of this year, when the group meets later this Sunday.

WTI crude oil futures lingers just under $79/b after settling 3.3 per cent lower last week at $77.72/b. In the past two months, Oil prices have continued to trade in a narrow range of $5 with WTI hovering near the lowest in three months as traders weighed decreased geopolitical risks and signs that global markets are sufficiently supplied ahead of next month's Opec+ meeting.

OPEC+ in focus

Given the shift in crude oil demand fundamentals since the start of second quarter, we expect Opec+ alliance to prolong output cuts into the second half of 2024 when they meet on June 2. Opec+ members are bound by the combined 3.66 mbpd production cut policy valid through the end of 2024, along with the additional voluntary cuts of 2.2mbpd, which is going to end on June 30. The combined output cuts are equivalent to nearly 6 per cent of global oil demand.

The producers will discuss whether to extend voluntary output cuts of 2.2 million barrels per day into the second half of the year.  Meanwhile Opec remains optimistic about global demand as it expects another year of relatively strong oil demand growth of 2.25 million bpd, but the International Energy Agency (IEA) expects much slower growth of 1.2 million bpd.

Strong summer demand

The Memorial Holiday weekend traditionally marks the arrival of the US summer driving season, characterised by more driving in the United States and higher demand for gasoline. Gasoline demand, which had been lying low since the start of the year, was surprisingly higher last week, reaching the highest level since November last year.

Additionally, flash economic numbers show that the world economy is doing modestly well, European economies, like in Germany and France, have started growing, raising the possibility that the bloc will emerge from a recession.

Economic data in focus

US core PCE inflation, Euro zone inflation, and China PMI figures are likely to be the economics highlights as we approach the end of May. The busy data calendar will also see GDP updates from the US, Canada, and India. Meanwhile the Fed's preferred inflation gauge, the core PCE price index, will be released for April on Friday.

Outlook

We expect crude oil prices to break the narrow trading range of $5 in the coming sessions on the back of strong summer demand. The latest weekly report from Vortexa shows that Crude Oil in Floating Storage had fallen 8.1 per cent to 74.82m bbl as of May 24, signalling strong demand from refiners.

We believe buying on correction would be a good strategy for the day as WTI will try to break the resistance of $80, while $76.50 and $75 continue to remain the strong support zone.

WTI Crude oil Jul :Support: $76.5, Resistance : $81

MCX Crude June:  Support : 6,400 , Resistance : 6,650

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