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Rising Cost of Capital Threatens Bullish Fundamentals

Market Overview

WTI futures had a slight extension over the previous weeks rally with prompt month contracts trading as high as $69.56. The fundamental environment remains supportive of oil prices on bullish demand and economic growth, but short-term market conditions warrant a corrective move lower. The rising cost of capital in the US has investors looking nervous in the short-term as market participants wager on higher rates and increased rate hikes from the Fed. US 10-year treasury yields are approaching the psychological level of 3.00% which has catalyzed heavy selling in stocks and commodities in the past. The US dollar stands to gain from rising rates which should dampen oil’s upward mobility.

Despite these short-term bearish factors, oil looks bullish over the medium-term. In May we have an important decision from President Trump on whether to honor the current agreement with Iran or reinstate sanctions which could target Iranian oil exports. In addition, we have rhetoric out of Saudi Arabia suggesting a $100 per barrel target for global oil. Russia and OPEC were quick to say there is no agreed upon price target, but traders have begun speculating that OPEC will try to overtighten the market.

Technical Analysis

WTI Futures

WTI has solidified its break above $66 following a test of support last Tuesday. Technical sellers were unable to outpace buyers as bullish fundamental news dominated the headlines. The technical bias remains long with price trading above trendline and horizontal support. Stochastics remains overbought, so technical sellers may try again to push price lower, especially given the bearish market tone at the start of this week and price’s proximity to trendline resistance. Overall, the technical and fundamental environments favor bullish sentiment, particularly on the dips.

ULSD Futures

Unlike WTI, ULSD futures have yet to break last week’s high as price has run into moderate trendline resistance. Stochastics pointing higher despite its overbought nature and crude pushing to short-term highs is encouraging ULSD buyers to maintain momentum despite seasonal trends. Resistance at $2.1227 is a key level to watch over the coming sessions.

RBOB Futures

RBOB is challenging a major area of resistance at $2.10 but is being weighed down by early selling pressure in WTI and ULSD. Stochastics is pointing higher, which should be attracting technical buyers to attempt a break above $2.10. We are seeing a confluence of short-signals via horizontal and trendline resistance, so we may see a pullback to a more reasonable level before making a successful push. The technical bias remains bullish and a successful break above $2.10 should entice additional buyers to enter the market.