Crude Breaks $80: Rally or Resistance Ahead?

Key Takeaway

• U.S. crude oil futures topped $80, signaling a potential breakout amid supply deficit forecasts and geopolitical tensions.
• Energy stocks, like the Energy Select Sector SPDR Fund (XLE), are aligning with crude's rise, up 9.21% YTD versus WTI's 13% increase.
• Analysts offer mixed views on sustainability of oil's rally; some see $80-$85 as a "sweet spot" for producers, others doubt long-term momentum.

Crude Oil's Bullish Signals

West Texas Intermediate (WTI) crude oil futures have recently surged, closing at $81.04 a barrel, marking a significant 3.8% increase last week. This upward movement is attributed to the International Energy Agency's forecast of a crude supply deficit and recent geopolitical tensions, including Ukraine's attacks on Russian oil refineries. Matt Maley, chief market strategist at Miller Tabak, emphasizes the importance of this breakout, suggesting that oil prices are aligning with the supply-demand dynamics but warns of potential geopolitical escalations that could further drive prices up.

Analysts' Perspectives on Oil's Future

Despite the bullish trend, opinions among analysts vary. Tom Fitzpatrick of R.J. O’Brien views the recent price action as "unequivocally bullish," highlighting a pattern where WTI prices dipped below the previous week's low before surging past the high. On the other hand, Bart Melek of TD Securities offers a more cautious outlook, suggesting that the rally might not sustain if OPEC+ countries, led by Saudi Arabia, decide to roll back production cuts. Melek also points out that current prices are within a "sweet spot" for Saudi budget needs without accelerating the transition away from oil.

Energy Stocks Respond to Oil's Climb

The Energy Select Sector SPDR Fund (XLE) has seen a 9.21% increase year to date, slightly lagging behind WTI's 13% rise. This suggests that energy stock investors are beginning to acknowledge the oil market's momentum, with Maley identifying $84 a barrel as the new resistance level for WTI. The support from the 200-day moving average at $78.13 a barrel further bolsters the bullish sentiment in the sector.

Geopolitical Tensions and Market Dynamics

Recent Ukrainian drone attacks on Russian oil refineries have underscored the ongoing geopolitical risks to oil supply, contributing to the price surge. These attacks, coupled with a drawdown in U.S. crude inventories, have disrupted the market's previous concerns over demand and supply forecasts. The International Energy Agency's revision of global demand growth and the continuation of OPEC+ production cuts through at least the second quarter of 2024 have further supported bullish sentiments in the oil market.

Street Views

• Matt Maley, Miller Tabak (Bullish on U.S. crude oil futures):

  "Oil is finally catching up to the supply and demand situation but it is still ignoring the geopolitical issues that could push it a lot higher if gets worse."

• Tom Fitzpatrick, R.J. O’Brien (Bullish on WTI and Brent crude oil):

  "It is impossible to not look at the move as unequivocally bullish."

• Bart Melek, TD Securities (Neutral/Bearish on crude oil prices):

  "I suspect these rallies will most likely not have too much staying power... We’re still faced with a soft landing in the United States. The U.S. Fed pivot is pretty much priced in."

• Carter Worth, Worth Charting (Neutral on U.S. crude oil futures):

  "$80 is just sort of a benign price. It’s not particularly high, it’s not particularly low... Sometimes things are where they belong."