Oil Price Fundamental Weekly Forecast – Heightened Volatility as Easing Restrictions Clash With Rising Supply

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures closed higher last week for a second consecutive week as more countries moved forward with plans to ease economic and social restrictions put in place to halt the coronavirus pandemic and as more output was reduced.

Despite the near-term strength, crude oil is still being pumped into storage, creating the possibility that any gains prompted by strong demand will be limited. Essentially, the market remains extremely oversupplied, but OPEC+ production cuts and other voluntary curtailments may be starting to have an impact on supply. Furthermore, the easing of economic restrictions could start to show the modest beginnings of demand recovery, but there is still a long way to go before the devastating demand destruction is erased.

Last week, July WTI crude oil futures settled at $26.17, up $3.88 or +17.41% and July Brent crude oil finished at $30.97, up $4.53 or +14.63%.

OPEC+ Production Cuts Begin, US Cutting Faster than Expected

The Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, a group known as OPEC+, began implementing a deal on record supply cuts amounting to 9.7 million barrels per day (bpd) from the start of May.

Meanwhile, North American oil companies are cutting production quicker than OPEC officials and industry analysts expected and are on track to withdraw about 1.7 million bpd of output by the end of June.

Demand Improves in China

China showed crude imports rose last month. Imports climbed to 10.42 million barrels per day (bpd) in April from 9.68 million bpd in March, according to Reuters calculations based on customs data from the first four months of 2020. However, overall exports from China also rose against expectations of a sharp drop, though a big drop in total imports suggested any recovery is some way off as economies around the world fall into recession, meaning demand for fuels will likely remain subdued at best.

Easing Restrictions Will Help Demand

Australia became the latest country to plan an easing of lockdown restrictions as infections from the coronavirus slow to a trickle, aiming to relax social distancing restrictions in a three-stage process.

France, parts of the United States and countries such as Pakistan are also planning to ease restrictions to stop the spread of the world’s worst health crisis in a century, Reuters wrote.

Weekly Forecast

Positive geopolitical developments could be the bullish wildcard this week. On Friday, the markets garnered a little support after U.S. and Chinese officials discussed a trade deal agreed before the coronavirus outbreak, with both sides agreeing to implement the agreement.

We’re seeing a lot of short-covering, but traders have been reluctant to go long given the bearish fundamentals. This may change if prices pullback into a value area. Furthermore, traders are not going to gain confidence in playing the long side until they start to see that the attempts to reopen the economy are proving to be successful.

Despite the recent strength, traders should continue to look for heightened volatility and the possibility of a wicked two-sided trade as some momentum traders get bullish on the easing of restrictions and some turn bearish again as inventories continue to build.