U.S. West Texas Intermediate and international-benchmark Brent crude oil are in the midst of a strong uptrend that began in late October. This uptrend is expected to continue as long as OPEC and its allies maintain control of their aggressive production cuts. Also underpinning prices is optimism over demand recovery especially in the United States. The markets are also receiving support from a pair of supportive forecasts from the OECD and OPEC.
The market will begin to face some headwinds in the near future, however. Iran is expected to increase production for one. Additionally, starting in May, OPEC+ could decide to raise output. Finally, there’s always a chance the U.S. could ramp up production to take advantage of the highest prices in over a year.
Traders could also feel some pressure this week, following last week’s technical reversal. During the week-ending March 12, both crude oil futures contracts posted potentially bearish closing price reversal tops. If confirmed, this could trigger the start of a 2 to 3 week correction.
The chart pattern is not a trend changing event. Often, it signals that the selling is greater than the buying at current price levels, or it could be a sign that the market needs to alleviate some of the upside pressure.
WTI and Brent crude oil are far from turning the main trend to down, but we could see a change in trend on the daily chart if $63.10 fails as support.
In my opinion, the main focus for traders over the near-term will be gasoline and distillate inventory numbers. Although crude oil supply tends to grab most of the headlines, I think gasoline and distillate demand will be the best indicator of a true economic recovery. These numbers will reflect an improving economy. As employment rises so should gasoline demand as more employees are likely to drive to work. Increased travel and vacationing should help the airline industry and consequently distillate demand.
RBC Capital analysts said the fundamentals for summer gasoline was the most bullish in nearly a decade.
With higher prices, however, comes the temptation to increase production and that could eventually weigh on prices.
Sustained higher oil prices are expected to encourage U.S. producers to increase output, which could eventually cap prices, JPMorgan analysts wrote.
JPMorgan expects U.S. oil output to average 11.36 million barrels per day this year compared to 11.32 million bpd in 2020.
Additionally, early last week, the government revised down 2021’s decline expected in U.S. crude production. Output is seen falling 160,000 bpd to 11.15 million bpd, a smaller decrease than its previous monthly forecast for a 290,000-bpd drop.