Crude Oil Prices Gain Support on Short Covering, Fundamental Concerns Persist

Overall confidence in the market fundamentals remains very fragile, but oil prices have gained some degree of relief from short covering and bargain hunting.

The Baker Hughes data recorded an increase in the number of oil drilling rigs for the 22nd successive week with a rise from 741 to 747 to the highest level since April 2015, although there was no change in the number of Permian rigs on the week. WTI was unable to break above the $45.00 p/b level on Friday and drifted to test support below $44.50 p/b in Asian trading on Monday.

Increases in US output remained a key negative factor for market sentiment, although there was some speculation that capacity constraints for oil-rig equipment could have a significant impact in curbing a further expansion in the number of rigs in operation.

The latest COT data recorded a decline in net long, non-commercial crude positions to 359,000 contracts in the latest week from 382,500 the previous week and this was the lowest reading for four weeks.

The data should offer some degree of protection against a further liquidation of long positions, although there is still scope for further short-term selling.

The latest Japanese trade data recorded a decline in crude oil imports of 13.5% in the year to May and there was also a reported 4.2% decline in India’s oil imports in the year to May. Concern over weakening demand was also an important factor eroding price support.

Saudi Arabia reported that crude exports fell to 7.006mn bpd for April from 7.232mn the previous month which provided some net support for crude, although crude output rose slightly on the month.

There was support below $44.50 and prices rallied ahead of the US open with a move to just above the $45.00 p/b level in the July WTI contract while August futures hit $45.20 and Brent traded around $47.70.

There was no significant impact from currency-market trends as USD/JPY consolidated around the 111.00 level at the US open.

Fundamental developments are liable to remain relatively limited in the short term with markets continuing to monitor OPEC supply trends.

Oil Prices 4-Hour Chart

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Tim is a contributing author to EconomicCalendar.com. He is an economist and has been involved in financial markets for over 20 years as an analyst. He specialises in global economic trends, macro policy and central banks. Extensive knowledge, experience and data mining is used to anticipate trends in equities, bonds and forex with a contrarian slant. He is a graduate of the University of York with a degree in Economics/Econometrics.