After slumping to a 15-month low in mid-March following the banking sector
turmoil, the surprise OPEC+ production cuts and curbed flows from Iraq
triggered a strong rally, lifting the price of WTI crude oil from a low of
$64.12 to a high of $83.53 in the short span of three weeks.
The OPEC+ bombshell plan to curb production by 1.7 million barrels a day
initially triggered a buying spree, with importers seeking to get ahead of
the cuts which start in May. But caution returned to the market and traders
are trying to gauge whether demand will be sufficient to sustain the latest
rally.
The economy of China, which is the biggest crude oil importer in the world,
grew by 4.5% in the first quarter of 2023 and the country’s oil refinery
throughput rose to record levels in March. However, the data pointing to a
rebound in the Chinese economy after its re-opening from Covid
restrictions, did not manage to boost oil prices.
After reaching a high of $83.53 in early April, the OPEC+ output cuts
inspired rally reversed course and crude oil prices have been falling
sharply over the past six trading sessions. Traders are worried the
potential interest rate hikes by the Federal Reserve could slow down growth
and lower oil demand, which offsets the positive effects of falling U.S.
inventories and the latest robust Chinese economic data.
Source: Tradingview
WTI crude oil has given up some of its OPEC+ supported gains over the past
week as initial optimism have faded. Although crude oil has not erased all
the gains from its March low, prices fell more than 7% from its recent
high, which is the biggest decline since mid-March, as demand concerns are
once again at the market’s forefront.
The latest IMF global economic projections reveal the slowdown effects of
the aggressive monetary tightening by central banks. Until oil fundamentals
begin to replace macro fears the short-term upside for oil is likely to be
limited.
China’s reopening and OPEC+ oil production cuts have raised expectations
for higher oil prices; however, risk appetite has been dampened and traders
are looking for signs of an improvement in demand.
Despite the current pullback, crude is still well above its March low, and
it appears the consolidation over the past five months might be part of a
base formation process. The recent break of the Relative Strength Index
above its ten-month resistance shows an improvement in the momentum
conditions, which suggests that the down trend from the March 2022 high may
have already bottomed.
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