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Brent Crude oil prices remain under pressure, and yesterday the future slid by 8.72% as traders are disappointed with the latest OPEC+ deal, stockpiles are increasing rapidly, and US economic indicators for March were shockingly weak.
Brent Crude oil prices have now given up 61.8% of their 68.6% gain from the 2020 low of $21.58. The next support level is the 78.60% correction level at $24.84 and is the last interesting support level before the 2020 low at $21.62. On a break to the 2020 low, crude oil prices might slide to the next support level, the 2001 low at $16.34. However, on the price remaining above the 2020-low, I think the price will trade sideways between $21.62, and the April high of $36.32.
Why are traders disappointed with the latest OPEC+ deal?
There are several reasons, but the primary reason is that the cuts do not go far enough. OPEC+ decided to reduce production from May by 9.7 million barrel a day. However, from July the production reductions will only amount to 7.7 million barrels, followed by 5.8 million from January 2021. The cut by 9.7 million b/d the same as about 10% of the global demand before the Coronavirus crisis, however, investors do not think that the cuts are enough.
Yesterday, International Energy Agency, the IEA, said it forecasted that even if lockdowns and travel bans were lifted that crude oil demand would be lower by 9.3 million barrels per day. The cut in production is therefore just enough to stabilise crude oil prices and not enough to send them higher. Also, a report about US stockpiles shows that stockpiles are increasing rapidly.
However, here comes the challenge and also an opportunity. Demand in crude is low today because of the crisis as most people are under lockdown and factories are closed. However, I think that crude oil demand will pick up in the next few months as the pain to keep economies closed will outweigh the pain of further deaths. The reopening of the world economy will not bring back demand to prior levels in just a few months, rather it will take time, and second-round effects of bankruptcies worldwide could further depressed demand. However, as we have seen, governments are ready to almost do anything to support their economies, the situation in China is not as bad as feared, and stock market have risen sharply from their March lows. Overall, I think we see quite a few signs that crude oil demand can pick up in the next few months, and I am actively looking for technical buy setups.
Brent Crude Oil Futures
By Alejandro Zambrano, Chief Market Strategist at ATFX.
