WTI Rally at Risk Ahead of This Week’s Crucial OPEC+ Summit
Matt Weller, CFA, CMT April 6, 2020 3:43 PM
Last week’s surge was driven by optimism around an immediate, coordinated supply cut, so if the perceived odds of such a move fall, oil could fall...
Global stock markets are rallying today on tentative signs that hotspots like Italy, Spain, and New York City may be turning the corner in their fight against COVID-19, but that optimism isn’t extending to the oil market. While the sharp contraction in demand for crude oil has played a role in the price collapse over the course of the year so far, the far bigger story is on the supply side of the equation.
In that vein, news that oil producers would meet to discuss supply cuts this week drove oil prices nearly 45% higher in the latter half of last week alone. However, news that summit will be delayed until Thursday, reportedly due to discord between Saudi Arabia and Russia as well as a lack of commitment from U.S. companies about output cuts, is driving oil prices down more than -6% so far today.
Like all commodities, there are mechanisms that drive the oil market toward equilibrium over longer timeframes. If the spigots remain open and prices remain low, higher-cost producers will eventually be driven out of business, reducing supply. Meanwhile, the low prices may also incentivize consumers and businesses to use more oil as the global economy recovers from the COVID-19 disruption, raising demand. That said, last week’s surge was driven by optimism around an immediate, coordinated supply cut, so if the perceived odds of such a move fall, oil could quickly retrace last week’s gains as traders bunker down for a longer period of a global supply glut.
From a technical perspective, West Texas Intermediate (WTI) oil has recovered to its 21-day exponential moving average for the first time since late February. The short-term trend remains definitively bearish at the moment, though a triple bullish divergence in the daily RSI indicator suggests that selling pressure has been receding on each of the last three lows, though bulls may want to wait for a successful retest in the low-$20s before growing more optimistic:
Source: TradingView, GAIN Capital
For now, the path of least resistance for oil remains lower until we get a comprehensive supply cut from major global producers.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.