The crude oil price has been on a strong upward trend since Wednesday when Brent and WTI slid to all-time lows. The price has bounced back on hopes that companies will cut production. Tensions in the Middle East have also helped.
Trump to extend social distancing
Crude oil price depends on demand and supply. The current problem is mostly because of the two factors. On the one hand, demand has tanked in most countries and on the other hand Saudi Arabia and Russia are continuing to pump.
The current crisis can easily be solved if oil producers stopped or slashed production and if demand is created. The supply side has been “partly” addressed by the 10 million barrels cut that was announced two weeks ago. I use the term partly because cutting supplies by these barrels per day is not enough.
The demand side can also be solved if countries start to reopen their economy. At present, supply cuts alone won’t help because people are simply not buying oil.
The demand side was dealt a blow yesterday by Donald Trump, who said that the current social distancing guidelines would be extended through the summer. This will mean a sustained period of low demand from the United States, which is one of the biggest oil consumers.
Current rally based on nothing
As mentioned above, the oil is rallying on hopes that companies will cut production and that tensions in the Middle East will help. The first point is true in that we will start seeing more oil companies fail while others will start cutting production. However, in the near term, this will not help because inventories are already at high levels. In fact, Vopak, the biggest oil storage company in the world has said that its tanks are full. Therefore, unless this inventory issue is addressed, supply cuts won’t mean anything.
Second, I don’t think Iran wants a conflict with the US right now since its economy is already battered by sanctions, coronavirus, and low oil prices. I don’t expect it to happen.
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Crude oil price technical analysis
On the daily chart, the Brent crude oil price has bounced back after falling to a low of $15.76 on Wednesday. The price is still above the 50-day and 100-day exponential moving averages. Also, the price formed a bullish hammer candlestick pattern before it started rallying.
So, the question is, has the crude oil price hit a bottom? I think it is too early to say this. In the short term, the price could rise and retest the 23.6% retracement level at about $29. Still, this does not mean that that the price has found bottom. As you can see below, the price has tended to recover slightly after recent bearish moves.
Therefore, in the short-term, I expect the upward trend to remain but I would also caution against being overly optimistic.
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