WTI rallies towards late-March highs in $116s on constructive China updates, Russia/OPEC+ output woes

Oil prices have maintained and extended on recent upside momentum on Tuesday, with front-month WTI futures rallying into the $115s per barrel and eyeing a test of late-March highs in the $116s. Constructive updates regarding the Covid-19 situation in China, with Shanghai reporting no Covid-19 infections outside of quarantine for a third day, have boosted hopes for imminent lockdown easing. This, combined with a general more risk-on feel to global macro trade and a weaker US dollar amid hopes the Chinese tech crackdown will also ease, has injected the latest impetus into WTI.

The US benchmark for sweet light crude oil now trades around $17 higher versus last week’s sub-$100 lows. While an easing of China lockdown fears has been the latest bullish catalyst, analysts continue to cite numerous other factors as supportive of prices. Firstly, traders continue to bet that the EU will soon agree on some sort of embargo on Russian oil imports (even though Hungary continues to push back), with some flagging a 30-31 May EU summit as a potential date where agreement could be reached.

An embargo would be a devastating blow to the already shrinking Russian oil output. Since the West imposed harsh sanctions on the nation for its invasion of Ukraine, Russian output has been in decline as exporters struggle to find buyers. OPEC+ output missed the group’s target by 2.6M barrels per day (BPD) in April, a Reuters survey released on Tuesday showed. Half of this miss was due to Russian output falling and things are expected to have gotten worse this month. But the latest report also highlighted the struggles many smaller OPEC+ nations continue to have in lifting output in line with their OPEC+ target, despite sky-high oil prices.

Continued Russia/OPEC+ output woes combined with an easing of China lockdown fears have proven to be a bullish combination for oil markets in recent days. Should risk appetite in broad markets (like in equities) continue to improve, WTI may well be headed back above its late-March highs in the $116s in the near future. This would open the door to a run higher towards annual highs around $130. Should the bulls fatigue, support in the form of earlier monthly highs in the $111s should offer short-term support.