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  • WTI has reversed earlier declines to as low as the $57.25 per barrel to trade back above the $58.00 level.
  • Crude oil markets are largely flat on the day as markets take a breather from successive days of gains.

Front-month futures contract for the American benchmark for sweet light crude oil, West Texas Intermediary (or WTI), has reversed earlier declines to as low as the $57.25 per barrel to trade back above the $58.00 level and is back in the green, setting the crude oil contract up for a seventh day of successive gains (so long it can stay above $58.00).

Upside momentum of previous days has largely petered out on Tuesday; global equities are taking a breather after major global bourses plowed to record highs for consecutive days last week, weighing on crude oil markets a tad. However, other industrial commodities continue to trade well given US dollar depreciation, and this is helping crude oil.

Fundamental Update

Underlying crude oil market fundamentals for the most part remain supportive. Indeed, the big three supportive factors are still very much intact; 1) OPEC+ compliance to its supply cut pact remains strong and the Saudi’s continue to force a tightening of global oil inventories amid their 1M barrel per day voluntary output cut, 2) vaccine rollouts continue at a pace and (for the most part) evidence suggests that vaccines work in lowering severe disease, deaths and transmission, implying a strong recovery later in the year and 3) the US Congress is still very much expected to pass a large additional fiscal stimulus package that is likely to send the US economy into “overdrive” (as various market commentators have been quoted as saying) by the end of the year.

Indeed, with Covid-19 cases now dropping substantially in the US and Europe, the recovery in demand already looks to be occurring; according to ING, “refinery margins already appear to be pointing towards a recovery in fuel demand, with them having strengthened quite a bit recently”. The bank continues that “these stronger margins should mean that we start to see refiners increasing their utilisation rates.”

Elsewhere, a reported drop in Libyan oil output due to a guard strike at Hariga Port will contribute to a near-term tightening of markets, though this news hasn’t injected further upside into a crude oil market that has come a long way in a very short time, and some might see as a tad “frothy”.

It is worth noting some of the risks to crude oil prices at these levels; bad vaccine news of earlier last month (re. AstraZeneca, Pfizer and Moderna production delays and the slow Eurozone rollout, combined with concerns about potentially vaccine-resistant new Covid-19 variants) weighed on the price action for a few weeks and any fresh negative developments could take some steam out of the recent rally. Meanwhile, elevated prices will present a test to OPEC+’s resolve; producers might be tempted to increase output to capitalise on higher prices.

WTI has already climbed half-way up 2019 price range

The speed at which crude oil markets have rallied in recent days has been breath-taking. Since breaking into the mid-2019 $50.00-$65.00ish price range, it has taken front-month WTI crude oil futures only about five-week to rally to the midpoint of this range. Bulls will be targeting a test of the top of this 2019 range around $65.00 over the next few months. Should prices falter, a test of the January highs of just below $54.00, which now happens to also coincide with WTI’s 21-day moving average would present an excellent dip-buying opportunity (as long as the long-term fundamentals remain supportive, that is!).