By Bhavik Patel
Oil fundamentals and the global macro are pulling in opposite directions, leaving the market undecided. Crude has benefited from Saudi warnings and a significant draw in US inventories this week, but it is struggling to make real headway because much of the market doesn’t want to buy ahead of a possible recession.
Oil prices have shed around 10% since the start of the year, primarily due to the slower-than-expected post-pandemic recovery in China. Some upward pressure could emerge if the debt ceiling is raised next week. There is also conflicting messaging from OPEC+ as Saudi Arabia hints at a possible production cut to boost prices, while the Russian minister stated that they do not expect any policy changes at the next OPEC+ meeting.
It is evident that Saudi Arabia is no longer interested in staying in the US’s good books and wants to increase the price, but they have to be cautious of Russia gaining market share in Asia by supplying at a discounted price. It seems OPEC+ is once again the de facto leader of the crude market and can manipulate prices according to their whims.
US Shale, which once countered OPEC+, is no longer a driving force as its output growth levels off and demand for drilling equipment falls in several areas of the US shale patch. US shale producers have chosen to return excess cash to shareholders instead of increasing drilling. According to Baker Hughes data, the US oil and natural gas rig count has declined 6% year-to-date to 731 last week, reversing a steady climb since the depths of the pandemic.
Additionally, speculators have significantly increased short positions to 184 million barrels as of May 16, marking a 140% increase from the previous month. Any upward movement can drive prices higher as there would be a large unwinding of short positions.
For the next week, crude is expected to trade in the range of 5700-6200. As mentioned before, both factors are in play, where OPEC+ intervention will prevent prices from settling lower, while prices fail to sustain higher levels due to recessionary fears. We believe crude will trade within a range with no clear direction.
The next triggers will be the US debt ceiling and the OPEC+ meeting, but neither of these events is likely to be a major trend-changing event. Since range-bound movement is expected, traders can consider taking positions near the resistance or support zones. Any push towards 6200 can be an opportunity to take a short position with a stop loss of 6300, while any price dip near the support of 5800 can be seen as a sign to take a long position with a stop loss of 5700.
(Bhavik Patel is a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)