$80 Oil, despite current weakness?

My colleague Fawad Razaqzada recently noted that the Brent oil price has been testing upwards resistance for several days but concerns over demand have prevented the bulls from committing to the upside. In recent days the bulls have been given supply side reasons to support an upward move, with news that suggests a tighter oil market in the second half of the year. Could oil move back above $80?

“A closing break above $77.00 to $77.50 will lift oil process above the technically important 21-day exponential average, providing us with an objective short-term bullish signal. This could then give rise to technical buying towards $80.0 next,” Razaqzada wrote on May 23. (Technical Tuesday).

Oil price dynamics aren’t straightforward. The Brent crude oil price has slipped back to $76.3 at the time of writing, but this could easily flip back. Tighter oil supply argues for higher prices; weaker global demand might offset the price impact. If the US leads the world into a global recession, prompted by failure of debt ceiling talks, higher interest rates, or both, and this would undoubtedly offset restricted oil supply.

Saudi Arabia's energy minister Prince Abdulaziz bin Salman Al Saud, said short-sellers betting oil prices will fall should "watch out", signaling that OPEC+, the Organization of Petroleum Exporting Countries and allies including Russia, could consider further increase output cuts at a meeting on June 4. "Speculators, like in any market they are there to stay, I keep advising them that they will be ouching, they did ouch in April, I don't have to show my cards I'm not a poker player... but I would just tell them watch out," he told the Qatar Economic Forum organized by Bloomberg.

Tightness in the oil market is becoming evident, according to data from the Energy Information Administration. US crude oil supplies, ex the Strategic Petroleum Reserve, fell 12.5 million to 455.2 million barrels in the week ending May 19, 3% below levels typically seen in mid-May. Gasoline supplies dropped by 2.1 million barrels, 8% below the five-year average for the week, and Distillate stocks declined 0.6 million barrels, 18% below seasonal levels.

Harry Altham, Energy Analyst for EMEA and Asia at StoneX, notes that this report raised eyebrows across the market.  This commercial drawdown was the largest seen since November 2022, and the scale of the draw caused technical buying in crudes, before Brent climbed back down from intraday highs above $78.60, eventually settling above $78.00 for the first time in three weeks. Altham concludes: “The data add to a growing body of evidence of global inventory draws, which could cause trepidation ahead of the OPEC+ meeting in two weeks.”