US DRILLERS BRACE FOR IMPACT AS OIL TRADES UNDER $65/BBL

The overarching theme for crude oil has been that production increases have offset supply constraints, but the trade situation has barged in to shake up the markets.

A Return to Uncertainty?

Crude oil prices are trading upwards on Thursday after an unexpected resolution from a imposed by the Trump Administration. The full scope of this decision was not immediately apparent, but the ruling effectively suspended the 10% across-the-board tariff and the "reciprocal" tariffs that had been granted a 90-day moratorium. The trade court granted the White House 10 days to reissue the orders. However, the Administration decided to appeal the decision instead, bringing back uncertainty.

The market did react positively to the ruling, with a combination of other factors since earlier this month. The potential for unimplemented tariffs could drive demand for crude oil as it improves the prospects of economic growth. However, the API report also showed a significant drop in petroleum inventories ahead of an anticipated increase in gasoline demand for summer travel, which supported the rise in crude prices.

Balancing Out Supply and Demand

Even before the ruling, after the White House agreed to continue its barring of Venezuelan crude exports, which could increase demand for oil imports from the Middle East. The primary focus was on the upcoming OPEC+ meeting on Saturday, with speculation that production curtailments would be reduced again, thereby increasing market supply. Over 800,000 barrels per day have been added in the last two meetings, which is seen as targeting US shale producers.

on exploration and production due to persistently low crude prices during the trade dispute. The number of drilling rigs in the US has decreased, but the drop in active rigs in the Permian Basin may be partially attributed to OPEC increases. Last week, the total number of rigs fell to 465, the lowest level since the end of 2021. Although the reduction in rigs implies a future supply squeeze, US shale oil has a, near current levels after the recent bounce from $55. Some companies with exposure to the sector, such as Diamondback Energy, have been forced to cut their guidance for the year. Even large firms like ConocoPhillips have warned that further decreases in oil prices (below $50 per barrel) would lead to widespread reductions in activity.

WTI Descending Triangle Pattern in Play?

Crude oil prices have formed a double bottom at $55 for the time being, but the structure of lower highs from $65 to $64 suggests a descending triangle pattern could be unfolding if bulls fail to reclaim the regional top. In the event of prices falling below the $60 handle and the longer-term descending channel, WTI could be exposed to the crucial $50 level or even lower. On the flip side, if bulls manage to push through the critical resistance and enter the higher range between $65 and $80, crude could accelerate toward $70 and the $72 swing in the medium term, assuming the bulls flip $65 to support.

Source: SpreadEx

Key Takeaways

Despite the recent ruling offering some respite, the ongoing trade situation remains uncertain, leaving the balance between oil supply and demand in a state of flux. While the drop in the US rig count suggests a potential future supply shortage, OPEC+ aims to curb production curtailments, as prices below the $65 level, which is the cost of producing oil, are forcing US shale producers to cut back on exploration drilling and leading to guidance downgrades. The potential removal of tariffs could boost global economic growth and fuel demand for crude, but current uncertainty in trade negotiations will have markets watching the $65 with increased interest.​