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Fundamentals

WTI oil prices shocked to the downside during the Asian session on Monday (May 22nd) and are currently trading around $71.8. Last Friday, the USD weakened as Fed officials changed their strong hawkish attitude, but oil prices began to pull back after surging higher to a key resistance position near $73.8, testing support above $70 during the day and once dropping to near $70.6. Besides, WTI was favored by the resumption of debt ceiling negotiations between the two parties in the U.S. and rebounded slightly in the early session.

Supply: according to the Kpler data, Saudi crude oil exports are expected to be 6.48 million bpd in May, down sharply from April. Its production in April was 10.46 million bpd, below the quota in the OPEC+ agreement. Moreover, Iraq voluntarily cut oil production by 211,000 bpd starting in May, but crude oil deliveries from northern Iraq to the Turkish port of Ceyhan have not yet resumed, with its production cut reaching nearly 450,000 bpd. In addition, the Canadian provinces, including Alberta, British Columbia, and Saskatchewan, are experiencing severe wildfires, which are expected to reduce Canadian oil production. Currently, the forecast is that Canadian oil production will shrink by about 250,000 bpd.

Demand: The EIA data indicates that the average daily demand for U.S. refined products for the four weeks ended May 12th was 19.934 million barrels, up 2% YoY and 0.4% MoM. Meanwhile, the average daily demand for gasoline was 9.085 million barrels, and the surge in gasoline demand led to gasoline inventories exceeding expectations by 1.4 million barrels. Furthermore, the U.S. is expected to start buying back oil for the Strategic Petroleum Reserve (SPR) for 3 million barrels of crude to replenish the SPR for delivery in August and is asking sellers to submit offers by May 31st. Thus, try to keep an eye on the implementation over the next week. Additionally, Russia said it will continue to support oil prices by acting on production cuts, and India is also rumored to replenish its strategic oil reserves.

In general, oil prices appreciated since the U.S. announced that it will recover the Strategic Petroleum Reserves (SPR) last week, while the market's optimistic sentiments regarding the oil demand and debt ceiling heat up. Nonetheless, the weaker-than-expected economic data from China and the U.S., the strengthening USD, and the expectation of the Fed rate hikes limit oil price gains, suggesting insufficient short-term trading space for crude oil. However, the market trading logic may gradually shift from the U.S. debt ceiling and the USD to supply and demand. Now, the demand-side factors that support oil prices will be determined by the recovery of the peak travel season in the United States, the pull of Chinese demand, and the absolute low level of U.S. inventories. On the supply-side, oil prices will be supported by the production cuts initiated by OPEC+, the limited shale gas output under U.S. low oil capital spending, and the supply constraints under geopolitics. Instead, the demand-side logic that constrains oil prices is the impact of the downward revision of demand in anticipation of a recession after aggressive rate hikes, and the low slope of China's economic recovery. The supply-side logic limiting oil prices is that the U.S. oil supply is still growing, and Russian oil exports have not yet contracted significantly. Since there is no obvious marginal bias from the above issues, the changes in these supply and demand factors, especially the replenishment of the SPR and the implementation of OPEC+ production cuts, may exhibit a clear trading clue. However, the current trading pattern remains oscillating.

Technical Analysis

Daily chart: MACD starts to form a golden cross, with WTI tending to be bullish shortly. The initial resistance is near the 20-day SMA (72.4) and further resistance is near the high on May 10th (73.8). If WTI can break this resistance, further bullish signals will be added.

The lower initial support is near the 5-day SMA (71.7). If the support is lost, short-term bullish signals will be weakened. Further strong support is near 70. Accordingly, it is recommended to go long at lows shortly, with the short-term targets to be the resistance above between 72.6-73.8 and the supports below between 70.5-70.

Trading Recommendations

Trading direction: Long

Entry price: 71.000

Target price: 77.500

Stop loss: 65.000

Support: 70.000/64.000

Resistance: 73.800/77.500