Brent crude oil extended its rally on Monday and logged back to back gains. A massive rally of $2 or 10% at $35.60 posted after traders encouraged by the Chinese oil demand recovery and output cuts. 

It closed the session at $35.60, its highest level since early April as Chinee demand rebounds to pre-COVID levels. The oil market sentiment has been improving from April levels as traders are keen to gauge whether there are any emerging signs of restarting economic activity. Since April low, the price has rebounded by more than 120%, which led by a few positive factors. OPEC+ supply cut kick in on May 01 and gradual easing lockdown rules are the key factors we believe. One of the factors is balancing the supply-demand equation, not a significant though, and easing lockdown restrictions is help demand. Last week’s IEA May oil report raised a 2Q2020 demand estimate. “For 2020 as a whole, last month’s forecast of a decline of 9.3 mb/d is improved to -8.6 mb/d”.

Last week’s EIA, OPEC, and IEA report painted a positive sentiment.

Output cuts summary as per IEA’s May report:

  • OPEC+ agreement has come into effect.
  • The United States and Canada saw output in April 3 mb/d lower than at the start of the year. In June, that drop could reach four mb/d, with perhaps more to come.
  • For June, Saudi Arabia announced that it would reinforce the agreement by voluntarily cutting production by one mb/d more than required.
  • US production could be 2.8 mb/d lower than at the end of 2019.
  • The UAE and Kuwait have followed suit with extra cuts of their own. This means that Saudi production in June will be an extraordinary 4.4 mb/d below April’s record level.

Altogether, IEA estimates a reduction in global supply in May of 12 mb/d, month on month.

Massive cuts in output from countries within and outside OPEC+ is helping the oil prices to rebound to $35.

Does the current rally have more legs, is the key question to traders? 

The A-B-C pattern is aiming at $45 levels, suggesting a gap-filling activity. Immediate resistances locate at $37.10 and $40.00.

Flipside supports located at $34.70, $32.70, and $31.40. And the higher low pattern is found at $29.30. As long as this is support, it can be approached with a bullish bias. It is buying on dips preferable.

The weekly 50-MA is located at $35.80. Before closing above this key moving average, the price could consolidate sideways for the next couple of days and eventually break higher towards the 20-MA (Weekly). On the daily chart, the price settles above 50-MA for the first time since January 2020. Silver and Copper closed above 50MA and marching further higher.

The May edition of EIA’s short-term energy outlook highlighted that “That declining global oil inventories next year will put upward pressure on the oil price.”

It is important to always keep in mind the risks involved in trading with leveraged instruments.

What is your Technical View?

Do you have a different idea? Please leave us a comment and get an answer from our professional analysts