CRUDE OIL FUNDAMENTAL FORECAST: BULLISH
- The Fed hawkish stance leads to some reflationary trade positions unwinding, but the central bank’s bias does not change the fundamental bullish outlook for oil prices
- As demand strengthens and supply remains constrained by OPEC+, crude oil will stay supported
- International travel normalization can be seen as another positive catalyst for oil markets near term
WTI and Brent oil prices have declined moderately from their multi-year highs recently amid broad-based dollar strength triggered by the Fed hawkish bias adopted at its June monetary policy meeting. Investors appear to have unwound some reflationary positions on the expectation that the central bank’s faster pace of policy tightening reflected in its dot-plot will dampen inflation and limit economic growth down the road.
While there may be some truth to the theory, traders may be getting ahead of themselves. Right now, scarcity and strong demand are more important factors for oil. That said, despite the market noise and sporadic volatility, the trend in crude oil prices has not changed overnight and remains bullish in the short/ medium term.
Over the next few months, demand should continue to grow robustly as the world economy reopens and comes back online. Although conditions have normalized significantly in many developed nations, the healthcare crisis remains largely unresolved in others. This is a sign that there is more upside potential for energy commodities.
In India, the world’s third largest oil consumer, the situation was dire up until May, but in recent weeks, the devastating second wave of coronavirus has begun to flatten out, prompting cities to lift lockdowns. As the government eases restrictions further and mobility increases across one of the most populous countries globally, oil demand will trend higher, boosting the hydrocarbon outlook at a time when OPEC+, aided by discipline from US shale producers, has managed to engineer a tight supply market, with a deficit of close to 2 million b/d.
On the other hand, it is true that the revival of the US-Iran nuclear pact remains a moderate headwind for crude prices, but even if there is some sort of agreement between Washington and Tehran in the near term, Iranian exports will not lead to oversupply, as consumption is set to continue to strengthen during the summer season in the northern hemisphere, helped by international travel.
On Friday, the European Union officially recommended to start lifting travel restrictions on U.S. visitors who had been fully vaccinated, with the rules taking effect within days. The Biden’s administration will likely reciprocate in short order, paving the way for the restoration of transatlantic leisure airline routes. This will undoubtedly unleash pent-up transportation demand, reinforcing bullish momentum.
As traders position for strong demand acceleration approaching pre-pandemic levels (100 m b/d) and inventories deplete, WTI and Brent will remain in an upward trajectory. There may be some hard-to-predict ups and downs along the way, but the underlying trend continues to be bullish. This may be a good opportunity to engage for traders with a long-term horizon and high tolerance for volatile assets. In any case, in the current context, it would not be surprising to witness a breakout in WTI prices and a follow-through move towards $75.00 or even above that.
WTI OIL PRICE CHART (DAILY TIME FRAME)
From a technical point of view, the first resistance comes at $72.50/73. Should buyers push prices above this ceiling, WTI could head towards its 2018 high near $76.80. On the downside, the first support in play on the daily chart appears near the $67 mark. If prices pierce this area, selling pressure could gain momentum and push WTI towards $61.50.
EDUCATION TOOLS FOR TRADERS
—Written by Diego Colman, DailyFX Market Strategist
Follow me on Twitter: @DColmanFX