FxWirePro: Crude oil outlook

After six days of consecutive decline, global benchmark Brent crude is up today but does that mean selloffs are over?

Probably not. Fear has taken a grip on the market and we expect that it will continue to rule heading into the referendum on June 23rd. Fundamentally speaking, the crude oil market is much better balanced compared to the beginning of the year. Production in North America has declined much faster than originally anticipated, which combined with unexpected large outages has put oil market closer to balance. Outages have been quite severe in Canada due to wildfire, Nigeria due to militant attacks, Libya due to port closure, and in Venezuela due to severe economic strain.

The oil market is looking to find a balance in price at a time when these outages are likely to decline over the course of next year, supply outside OPEC declining and OPEC led by Iran increasing its output. As oil is looking for fundamental cues at this point, we feel that the latest move is not fuelled by fundamental but rather long bookings. CFTC’s COT report showed speculative longs have been one of the major reasons behind this recent recovery in oil price. The net long positions in NYMEX light sweet crude almost doubled in June compared to 163.5K contracts seen in January.

Hence, oil is subject to vulnerabilities from further long bookings, which seems very reasonable heading into the referendum.

Trade idea –

• We expect WTI benchmark to decline towards $41 per barrel area in the near term and towards $43 per barrel for Brent. Both are unlikely to break recent highs in the near term.

However, we must note that further gains possible in the medium term and $40 area support would be crucial for that.