- Oil prices staged a strong rally on Thursday, with first month WTI futures rising almost $8.0 towards $102.
- While prices are still $27 below last week’s highs, Thursday’s rally may signal the end of the recent bear run.
oil prices experienced a strong rebound on Thursday, with WTI futures of the first month rising almost $8.0 (or more than 8.0%) from below $95.00 per barrel to current levels of $102.00.
As for the catalysts behind Thursday’s rally, there has been no clear headline or factor driving the rally, but analysts have come up with a number of explanations. First, the uncertainty over whether or not the Russian-Ukrainian peace talks can reach a ceasefire to end the increasingly brutal war remains very high. Conflicting reports with various media outlets citing different sources make it difficult for investors to figure out what is really going on.
That is helping to maintain a high degree of geopolitical risk premiums in energy markets amid uncertainty about what will happen to Russia’s vast exports. On this issue, the International Energy Agency warned on Wednesday that while higher oil prices will likely destroy around 1 million barrels a day in demand, the loss in Russian supply would be far greater. Morgan Stanley reached a similar conclusion in a note on Thursday, with analysts at the bank forecasting a 1 million barrel per day drop in Russian oil production from April, which would more than offset a downward revision to 600 thousand barrels per day of global demand.
On the other hand, concerns about lockdowns in China eroding oil demand have eased somewhat as Covid-19 cases start to fall again and sentiment in Asian markets has received a big boost from the recent announcement. Chinese officials support new policies. “China fears” were a big reason why WTI dipped below $100 a barrel earlier in the week and as they fade it makes sense to see oil recover.
As for what lies ahead for oil markets, geopolitics remains the biggest big risk. If a peace deal suddenly looks very likely and is about to be announced, this is a huge downside risk for prices, which could easily drop below previous weekly lows of $93.50. In the meantime, it is worth monitoring the risk of Covid-19 in China to see if the authorities can get things back under control.
Technical levels
Source: Fx Street
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