Crude oil struggles near two-month low

Key points

• Crude oil remains rangebound near a two-month low, with Brent facing technical resistance above USD 84 and market weakness seen in falling spot premiums and weaker US refinery margins.
• Despite trading up by around 12% year-to-date, crude prices are pressured by loosening fundamentals, with OPEC+ likely extending production cuts at their June meeting to support prices.
• Hedge funds have been net sellers of WTI and Brent crude since mid-April, reducing their net long positions by 40%, contributing to weaker market fundamentals and lower prompt spreads.

Crude oil continues to trade rangebound near a two-month low with prices being kept relatively low amid technical resistance above USD 84 in Brent and weakness in several market measures – such as falling premiums for spot Brent over futures, and weaker US refinery margins – pointing to a soft patch in the current demand outlook. Crude prices nevertheless trade up by around 12% year-to-date, supported by another year of expected robust demand growth and OPEC+ production restraint being only partly offset by strong non-OPEC supply.

The failure to hold onto the USD 90 handle, the preferred price area for most OPEC+ producers, and faced with loosening fundamentals, an extension of current production cuts at the upcoming OPEC+ June meeting will be the most likely outcome, however, with a price-supportive seasonal pickup in demand looming, we only see a limited risk of Saudi Arabia and friends being forced once again to defend their price line in the sand, somewhere below USD 75 per barrel Brent.

Brent crude, the global benchmark, currently trades sideways within a USD 81 to USD 84.50 channel with main upside resistance being provided by the 200-day moving average, currently at USD 84.30. A break below USD 81 may trigger a technical sell reaction from tactical traders seeing a break of a head and shoulder formation.