WTI: Bulls capped at fresh highs in $28 handle

• WTI bulls capped at 6-week highs made on production cut adherence hopes.
• Path of least resistance remains bearish should inventory accumulation dive again, or COVID-19 flares up.

 The price of oil has been on fire since the start of the week, penetrating through resistance and advancing some 13% since Monday. West Texas Intermediate crude for June delivery hit a 6-week high on Thursday and spot prices have followed suit in Asia today. However, at the time of writing, WTI trades at $27.71, down over 1% from the $28.22 highs.

The US dollar is one to watch at this juncture. While equities continue to defy gravity, the US dollar could be telling a story. Markets are nervous, there is uncertainty pertaining to global businesses attempting to get back to work as governments seek to keep credit going and get money velocity moving. All eyes are on COVID-19 cases, with the recent flare-up in China and some parts of Europe as the world death rate crosses a bleak milestone of 300k. If fact, China has just reported 11 new asymptomatic coronavirus cases in the Mainland as of end-May 14. Bets are off the table for a V-shape recovery and that has to pressure oil prices. However, bulls are still looking for something here and that boils down to a couple of recent developments in the oil industry. 

Further trimming of Gulf oil sales has given a boost to prices

Firstly, the pledges from Gulf countries to accelerate the Great Rebalancing by further trimming their oil sales has given a boost to prices. Saudi Arabia has urged its fellow OPEC members and their partners outside the cartel to cut deeper into their oil production. This is an attempt to speed up the rebalancing of oil markets.

The Saudis have promised to deepen its own cut quota by as much as 1 million bpd to 7.5 million bpd. Reuters reported, citing the Saudi Press Agency which reported on a government statement that read as follows: “The Kingdom of Saudi Arabia’s initiatives aim at urging the countries participating in the OPEC+ agreement and other producing countries to adhere to the cut rates and to provide more reduction in production in order to contribute to restoring the desired balance of the global oil markets.”  

Secondly, the US has just marked its first inventory draw at Cushing for the first time during the coronavirus trading regime. Analysts at TD Securities argued that"as the rate of inventory accumulation continues to ease, so will the steepness of the super-contango."

We remain long WTI Dec20-Dec21 spreads to express this view. With that said, CTAs remain positioned for further downside, and we do not expect significant flow from this group of participants.

WTI levels

Prices are now back to the monthly resistance structure dating back to 2000. It will take an upheaval in the market and a return to the norm in the global economy for a push back to the $40s and Dec 2018 levels. The path of least resistance is south with $19.50s a safe landing spot on the way down. However, $33 is a feasible upside target so long as countries participating in the OPEC+ agreement and other producing countries actually adhere to the cut rates. 

Energy markets are firming amid a more negative risk sentiment environment — implying that the recovery in the complex is resilient enough to withstand ebbs and flows in risk appetite. This comes amid pledges from Gulf countries to accelerate the Great Rebalancing by further trimming their oil sales, just as the US marks its first inventory draw at Cushing for the first time during the coronavirus trading regime. As the rate of inventory accumulation continues to ease, so will the steepness of the super-contango. We remain long WTI Dec20-Dec21 spreads to express this view. With that said, CTAs remain positioned for further downside, and we do not expect significant flow from this group of participants.