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Fundamentals

Macro: On Monday (May 8th), the Fed released its Financial Stability Report, which showed that banking system stress, real estate stress, and persistent inflation are the main concerns for current financial stability. In addition, concerns about the economic outlook, credit quality, and financing liquidity may lead banks and other financial institutions to further contract the supply of credit to financial institutions. A sharp contraction in credit supply would push up financing costs for businesses and households, potentially leading to a slowdown in economic activity and posing significant downside risks to U.S. economic growth.

Demand: The market generally expects China's economy to grow by more than 5.5% in 2023, which is equivalent to 1 million bpd of the 2.6 million bpd increase in global oil demand this year. Meanwhile, the International Energy Agency, in its April oil market report released on April 14, expects global oil demand to increase by 2 million bpd this year to a record 101.9 million bpd, with China set to become a significant driver of global oil demand growth this year. Besides, the General Administration of Customs of the People's Republic of China revealed that crude oil imports increased by 4.6% to 179 million tons in the first quarter of this year.  

Supply: From May, OPEC officially started to cut production by 1.66 million bpd. Focusing on the implementation of production cuts, the crude oil market may again experience a significant supply shortage.

Inventory: U.S. crude oil inventories shrank by 1.3 million barrels to 459.6 million barrels in the week ended April 28th, compared to analyst estimates of a 1.1-million-barrel decrease. U.S. crude oil inventories are expected to fall for a fourth straight week when they are released tomorrow.

In general: While recession fears remain a possibility for further deterioration, the biggest change from last November in terms of oil prices is the further OPEC+ production cut of 1.66 million bpd, which undoubtedly played a huge role in providing a solid bottom for oil prices given the slow increase in U.S. shale oil production. However, oil prices reflect the competition in international relations and geopolitical risks, and the height of subsequent oil prices is determined by the recovery of Chinese demand. From the current perspective, market risk sentiment is turning positive, which may support oil prices to climb further higher in the short term. Nonetheless, in the medium term, whether oil prices can move the volatility range from $70 to $80 or even $90, will be affected by the geopolitical changes. In general, oil prices have improved significantly compared to last November with further downside space getting limited, indicating an optimistic trend.

Technical Analysis

Daily chart: MACD extends its death cross signal at highs but gets closer to the oversold zone with the trend to turn down, suggesting a weakening bearish momentum. At present, after the plummet in April, oil tends to form a double-bottom pattern. Moreover, oil prices stabilized near $64 at the bottom and started to rebound, with the center raising to over $70. Now, oil is testing the resistance at $72.5. If it stabilizes here, the oscillation range will then climb over $80.  

Trading Recommendations

Trading direction: Long

Entry price: 72.000

Target price: 80.000

Stop loss: 64.000

Support: 70.000/64.000

Resistance: 80.000/83.300