Oil Extended Gains, is This the Start of a Bull Run?

20 May 2024

By Priyanka Sachdeva, Senior Market Analyst for Phillip Nova

Various chess pieces are moving in the oil market’s backdrop leading to volatility and uncertainty. Extending gains from last week, both benchmarks WTI and Brent, started the fresh week on a positive note after promising cues from mainland China. The Chinese authorities are rolling out a massive, $1 trillion bond issuance this week- Beijing’s first major act of fiscal stimulus. Oil also drew support after news of the US government saying it had procured about 3.3 million barrels of oil to refill the Strategic Petroleum Reserve. The US authorities hoarded oil at nearly $80 a barrel, instead of the usual $70 a barrel, which is seen as clear evidence of a bullish oil market.

On the daily chart, we can see that crude oil managed to breach below the trend line joining recent lows, twice this month but eventually rallied back above it leaving behind a hammer candlestick pattern. Oil currently hovers just below the resistance zone of $79.80-$80 a barrel, which coincides with 20 Day moving average. Markets might find the Bears stepping in with a stop loss of 50 Day Moving average of $81.90 per barrel for a break below the trend line with a better risk-to-reward setup. Ideally, with global economic concerns in the short-term, the resistance zone of $80 per barrel in WTI on a daily chart should hold.

The US Dollar took a nose dive after US April inflation reports showed mild easing and labour markets reflected signs of easing. The easing US Dollar makes investing in Crude oil lucrative but the mixed demand side cues across the globe have been limiting the upside in oil. Adding to the tailwinds is the news of the Iranian plane crash leading to the death of President Ebrahim Raisi, just a couple of months ahead of the Election. Geopolitical stress has been causing enough traction in oil prices since the beginning of 2024 and markets fear that the news could further disrupt the global flow of oil supplies.

Investors are advised to be cautious of incoming data, as we believe that the potential downside risk is much greater than the potential upside risk. The recent market correction appears to be stabilising in the new week, but if we receive negative economic indicators at these levels, those bearish on oil may attempt to retest $70 per barrel zone. The current strength in oil is purely a function of easing US Dollar especially, as past couple of weeks’ markets shunned away from the “war premium” after news of Israel-Hamas’ resolve surfaced. It seems that the demand-side narrative has become more dominant than supply-side concerns. The US inventory drawdown points to a steady boost in demand ahead of the summer travel season while the International Energy Agency cut its demand forecast for oil in 2024 slightly, denting sentiments.

Oil markets are widely awaiting the outcome of the Organisation of Petroleum Exporting Countries meeting scheduled for June 1, where the cartel is expected to continue the “voluntary cuts”. The extension can lead to tightly supplied markets and any rebound in demand from China, which apparently is hoarding cheaper oil, would add to bullish bias in oil prices.

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