Oil Prices Fail to Go Up

Brent crude prices have seen a modest 0.7% increase, reaching $86.35 per barrel. Despite attempts to test the resistance zone at $87.00-92.00 per barrel earlier in the week, similar to mid-March, they fell short. This pattern suggests a potential period of heightened volatility ahead, signaling caution for oil markets.

This anticipated period of volatility could persist until mid-May, potentially leading to a precarious downside scenario with prices possibly plunging to $50 per barrel. While such a drastic decline may seem unrealistic at present, it could swiftly become a possibility if prices dip below the $80 per barrel mark. In an effort to counteract such risks, OPEC+ has extended oil production cuts by 2.0 million barrels per day until June, though the effectiveness of this measure remains uncertain.

Despite the looming uncertainty, there are factors that could provide support to oil prices. Recent reports indicate an improving economic landscape in China, with growing manufacturing activity and consumer spending. Additionally, China's labor market appears to be experiencing a prolonged period of tightening, while the real estate sector is showing signs of improvement, albeit from a negative standpoint. These developments, coupled with OPEC+ efforts, may help sustain oil prices at elevated levels above the $81.00-83.00 per barrel range for Brent crude.

JPMorgan analysts suggest oil prices could surpass $100 per barrel underscoring the potential impact of further oil export cuts from Russia. However, for this scenario to materialize, it's imperative that prices maintain levels above $80.00 per barrel by mid-May. Investor sentiment reflects consideration of such possibilities, with the United States Oil Fund (USO) reporting $70.2 million of net capital outflows last week, which is above average. This week investors withdrew another $16 million. Perhaps they believe that the support at $81.00-83.00 per barrel is solid enough. But that doesn’t meant investors should continue to stay in long positions during bearish pressure.

Despite an uptick in U.S. oil inventories, which rose by 3.16 million barrels against expectations of a 700 million barrel decline, the market awaits more substantial catalysts to drive meaningful movements.