Crude oil has rallied about 3.5% today, potentially paving the way for more gains in the days ahead. Today’s upsurge was mainly in response to news of a big drawdown in US crude oil stocks to the tune of 5890K barrels last week vs. 2700K expected. But with other risk assets also rising, there is no doubt that optimism over the re-opening of global economies has also helped to fuel the rally after a lengthy consolidation in recent weeks.
Sentiment has been boosted by signs that the Eurozone has finally got its act together in ramping up Covid vaccinations. Concerns about links to cases of blood clotting with Johnson & Johnson’s vaccine have also been shrugged off as the US government assured the public that it has plenty of supplies of other Covid vaccines.
With easing of restrictions, travel and holidays will hopefully resume as we head towards the summer. This is why oil forecasters have pushed up their demand expectations. The IEA, for example, boosted its oil demand forecast for 2021 today and now expects an increase of 5.7 million bpd of crude oil compared to last year. A day earlier, the OPEC had raised its 2021 oil demand growth forecast to 5.95 million bpd.
At the same time, the OPEC and allies appear keen to relax their supply curbs very slowly.
The net impact of this is that demand looks set to recover at a quicker pace than supply growth. Against this backdrop, investors are happy to keep buying the dips in crude oil.
The key risk facing the crude rally is if production is ramped up faster than people expect, or we get more lockdowns in top oil consumer nations, such as India.
Today’s rally means the recent consolidation has been resolved with the bulls coming out on top.
Source: ThinkMarkets and TradingView.com
The sellers are now likely to aside until prices rise to more significant resistance levels like $63.60 or $65.00 on WTI. Key support is now the base of the breakout around $60.75, with additional supports coming in at $61.65 and $62.25 – the latter being the high of the recent consolidation range. However, if the above levels fail to provide support and oil gives back its gains then the bulls will be in trouble. Specifically, a potential break below $58.75, the most recent low prior to the breakout, would mark an end to the short-term bullish price structure.