Key themes and the outlook for oil prices in Q2 2021

In this article we look at how oil prices have reacted to demand and supply side pressures as well as provide a trading outlook for these commodity prices in Q2 2021.

Brent crude and WTI oil prices up more than 20% year to date

The prices of Brent crude and West Texas Intermediate (WTI) oil have gained more than 20% for the year to date. Gains in the commodity have been reflecting the suggestion of increasing demand with global economic activity picking up while Covid-19 vaccine rate speeds up as well. While demand prospects for oil have improved, the supply side has seen ongoing production curbs from members of the Organization of the Petroleum Exporting Countries (OPEC) and its ally countries (OPEC+).

Key supply and demand side drivers for the oil price

The future of oil prices will remain subject to these catalysts going forward, namely future production decisions by OPEC+ and the pace of demand growth (which will be linked to the speed of the post-Covid economic recovery).

Production of crude oil is expected to see a pickup in May, as guided by OPEC+ in early April. The production increase will be furthered by the unwinding of voluntary output curbs from OPEC’s largest producer Saudi Arabia. The US Energy Information Administration (EIA) predicts that these factors will see an increase in OPEC production from 25.1 million barrels per day in first quarter (Q1) 2021 to 25.8 million barrels per day in Q2 2021, while the production figure could increase to as much as 27.9 million per day in the second half of 2021. The EIA has also forecast US crude production to remain relatively flat in the second quarter from the first quarter.

In terms of consumption, OPEC+ has forecast an increase in demand to primarily be realized in the second half of 2021, expectant of a year on year increase of around 5.89 million barrels per day.

Brent Crude oil price: technical analysis

The price of Brent crude could be forming a bearish head and shoulders pattern, as highlighted on the chart. This pattern is not yet confirmed. To confirm the head and shoulders reversal, the price would need to close below the $60.30 support level. This scenario would constitute a downside break and possible reversal in the longer-term trend from up to down.

$65.30 provides upside resistance for the price of Brent. For now the price trades within a range between $60.30 and $65.30. Should the price break above range resistance at $65.30, the head and shoulders pattern would lose its relevance and instead a short-term bullish bias would once again be assumed.

WTI oil price: technical analysis

Similarly to Brent crude the price action on WTI oil could be forming a bearish head and shoulders pattern, as highlighted on the chart. This pattern is not yet confirmed. To confirm the head and shoulders reversal, the price would need to close below the $57.20 support level. This scenario would constitute a downside break and possible reversal in the longer term trend from up to down.

$61.75 provides upside resistance for the price of WTI. For now the price trades within a range between $57.20 and $61.75. Should the price break above range resistance at $61.75, the head and shoulders pattern would lose its relevance and instead a short-term bullish bias would once again be assumed.

In summary

  • WTI and Brent crude oil have gained more than 20% in the Q1 2021
  • Gains in oil have followed extended supply curbs by OPEC+ and demand side assumptions on a return to economic growth
  • Q2 2021 is likely to see a marginal increase in output from OPEC+
  • WTI and Brent charts show short term trading ranges for oil prices with the emergence of head and shoulders patterns (incomplete) cautioning the possibility of a longer term trend reversal

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