Oil Price Fundamental Daily Forecast – With Production Cuts Out of the Way, Demand Needed to Sustain Rally - FX Empire

U.S. West Texas Intermediate and international-benchmark Brent crude oil price are trading higher on Monday in the wake of bullish supply news from over the weekend. The markets opened better as expected, but are currently backing off their highs. The skeptic in me sees a potential “buy the rumor, sell the fact situation developing.

Why? Because nearly all analysts expected OPEC and its allies to go along with the widely anticipated production cuts extension. Now that the issue is out of the way for at least couple of months, the focus could be shifting to demand. For the most part, the supply can be controlled by a couple of turns of the spigot although there are some cases like unexpected outages such as pipeline attacks when officials lose control. However, no one can force the issue of demand.

At 09:21 GMT, July WTI crude oil is trading $39.86, up $0.31 or +0.78% and August Brent crude oil is at $42.66, up $0.36 or +0.85%.

With global overproduction issues seemingly under control, at least for the time being, traders are likely to be watching two issues over the near-term:  U.S. Production and Global Demand. These two factors are likely to dictate the duration of the current rally. Will the rally extend much beyond current price levels, or will we start to see signs of selling pressure?

Trader reaction to last Friday’s closes could offer us some clues as to what traders are thinking. Holding above these levels will indicate that the news of the extensions is bringing in new buyers, while a failure to hold this level will indicate that much of the news has already been priced into the market.

Two Factors Providing Support

Oil rallied early on Monday after major oil producers agreed to extend a deal on record output cuts to the end of July and as China’s crude imports hit an all-time high in May.

On Saturday, OPEC+ agreed to extend the deal to withdraw almost 10% of global supplies from the market by a third month to the end of July. Following the extension, top exporter Saudi Arabia hiked its monthly crude prices for July.

Low prices have been popular enough with Chinese buyers to boost imports. Data from over the weekend showed purchases by the world’s largest crude importer rose to an all-time high of 11.3 million barrels per day in May.

Daily Forecast

The early session rally looks like a knee-jerk reaction to the output cuts extension news. The subsequent intraday pullback suggests bullish investors are already asking, “What have you done for me lately?”

The Chinese import data is supportive, but it is old news from May. We’re wondering if higher prices will start to discourage buying and undercut a fragile demand recovery.

We could know this week if crude oil prices have gotten ahead of the economic recovery in the U.S. when the Fed reveals its economic forecasts on Wednesday.

Crude oil traders may be thinking the recovery will be V-Shaped because of the chart pattern in the stock market, however, the Fed may have other ideas. If central bank policymakers hit stock market investors with a dose of unexpected reality then crude oil could fall in sympathy with equity prices.


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