Why Oil might be Gearing up for an Upward Push




By Chinedu Okoye 

Summary:

- Crude continues to hold at above $60 for both benchmarks, even as trade uncertaities persiste. 

- This is line with our call in the H2 Outlook with both fundamentals and technicals favoring a stronger oil going forward in the year.

- The China Industrial weakness and ‘sanctioned’ and discounted Russian Oil, coupled with a De-Dollarized transaction settlement, is offset by low US production with OPEC having a neutral effect as some members struggle with meeting production quotas.

- Though fundamentals support a strong oil going forward, technicals show a.mixed singla with the moving averages for WTI and BRENT signalling a weak oil.


Oil Stays withing Range:

Crude oil continues to hold above $60 for both BRENT and WTI despite a brief period of decline to believe he $60 benchmark. This price was predicted in our paper where we posted that oil will most likely hold at the $60 level but an upward trend is not ruled out and we stay bullish on that.

The BRENT benchmark traded at $68.25, as crude was upbeat in the Asian hours and remains so going into the Euro open. 

 

(BRENT month-on-month Chart as at 07:23 am today)

 WTI mirroring BRENT moves were just as well, also upbeat inraday at $65.79, this brings the average to $67.02 on a $2.46 spread, tighter than the $3 resistance range. 

 

(WTI intraday Chart as at 07:23 am)

A major contributor to these is that –despite bear market fears earlier in the year, trade uncertainty, and weaker than desired industrial profits in China –US production is slower than required to offset inelastic demand.

In other words, the US, is a supply side mover–seen OPEC production quotas haven't translated to supply increases– is low on production and outcompeted by two of the world's largest Oil markets (China and India) by the cheap Russian Oil. This has put a floor on prices and widened the BRENT - WTI spread.

The low production tend to offset the weaker Chinese (and Indian) demand.

 

Fundamental View:

China and India purchases of Oil amounted to 35% (25% for China and 10% for India) in 2024. Meaning the demand side is greatly affected by these two countries. However both countries are major buyers of the discounted Russian crude, which is settled in their respective currencies, insulating them from both global supply shocks and dollar fluctuations.

On the supply side the US is a major factor, and this offsets the demand side weakness in the oil market. However international trade uncertainties also adds downwards pressure on oil prices. The US also being a demand side heavy weight in the global oil market, is supportive of prices at the $60s - $70s level for crude. 


Technical View:

Here we look at the chart and moving average analysis to analyze the monthly price movement 


Charts:

In the past month, BRENT has been stuck within the $67 and $70 range with $69 acting as a resistant level above which a downward retracement follows. However the BRENT oil benchmark hit levels above $70 within the month.

(BRENT month-on-month Chart as at 07:23 am)

WTI is up +1.25% month-on-month trading at a close spread to BRENT which suggests demand is higher relative to supply for Crude globally despite the tepid industrial activity in the Asian economic powerhouses, and trade uncertainties. WTI's support level for the past month or pivot point if you will has been $65, with a resistance at $67.


(WTI month-to-month Chart as at 07:23 am today)


Moving Averages:

Moving averages tell a different story, with the 50 daily moving average (DMA) for WTI at par with the 200-dma at 65.67 and 65.58 respectively. BRENT's 50-dma stands at 68.54 and q 200-dma of 68.75.


Remarks:

  • The resilience at current levels and the $3.18 spread suggest that the oil market conditions [out of the US] could be headed for a bullrun.
  • This bullrun run case is also supported by the fact that OPEC isn't likely to raise production quotas further, coupled with the structural issues plaguing smaller OPEC countries (eg Nigeria).
  • If US production didn't improve, and OPEC isn't willing or able increase production, prices may hit $69 (WTI) and $73 (BRENT) between the end of this quarter and the next.
  • It would take a recession in major economies, for crude to slide below $61 and $65 for WTI and and BRENT respectively.
  • Because spreads are tighter and because of the continual testing of resistance levels, the rest at the above supply levels suggest a bullish run is in the offing for oil, and both fundamentals look supportive.
  • There is however a strong chance that crude remains locked in the $65 - $67 and $67 - $69/$70 range for WTI and BRENT respectively. 

 

 


 

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