Oil prices struggle to find footing, but medium-term outlook remains optimistic

OIL PRICE OUTLOOK:

  • WTI prices have corrected lower in recent days on demand concerns
  • Despite Near-Term Headwinds, Oil Maintains Medium-Term Bullish Outlook
  • From a technical standpoint, if the critical support around the $100 level holds, buying interest could increase, paving the way for a move towards $105.00.. A breakout, on the other hand, can portend further losses

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Crude oil (WTI) prices started the week on the back foot and suffered their the biggest drop since the end of Marchdown more than 6% intraday, weighed down by demand concerns because of the confinements in China and growing speculation that the world could be heading into a recession. Tuesday, selling pressure eased early in trade but picked up in the afternoon as WTI futures fell more than 2.5% to ~$100 a barrel, while traders remain reluctant go back to assume long positions with lots of unknowns still persists.

Despite recent weakness and turbulence, oil maintains a medium-term bullish outlook due to supply and demand imbalances in world markets. Although the current Wave of COVID-19 and associated lockdowns in China may create short-term headwinds and fuel volatility, the situation should improve in the coming weeks once mobility restrictions are lifted.

Judging by the downward trend in new coronavirus infections and drop in community transmission in Shanghai, the government could start easing shelter-in-place measures by the end of the month or, at the latest, early June if historical trends prevail. Once this happens, oil imports are expected to accelerate ahead of the high-demand summer season, supporting fossil fuel prices.

There is also another bullish driver on the horizon: the project of the European Union of bar Russian oil imports on its attack on Ukraine. The embargo is still being negotiated despite the opposition of several member states, such as Hungary and Bulgaria, but the two countries have shown a willingness to compromise if they obtain exemptions and manage to obtain energy sources alternatives. In any case, it is expected that there could be an agreement to move forward on the new sanctions package in the second half of May. Details are being finalized, but once fully implemented over six months, the progressive in banot could displace some 3.5 million barrels of crude and refined products from Russia, worsening the market deficit by the end of the year.

In terms of technical analysis, WTI prices are trading above trendline support near the psychological $100 level at the time of this writing. If the bulls regain control of the price action and trigger a significant rebound, initial resistance appears at $105.00, the 50-day simple moving average, followed by $108.00. On greater strength, focus shifts to $111.55, the 50% Fibonacci retracement of the March/April decline. On the other hand, if oil extends the recent correction and breaks below $100 a barrel on weekly closing prices, selling interest could gain ground, paving the way for a move towards $95.35, followed by $93.00 April low.

CRUDE OIL TECHNICAL CHART

WTI Oil chart prepared using TradingView

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—Written by Diego Colman, Market Strategist

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