After slumping to a 15-month low in mid-March following the banking sector turmoil, the surprise OPEC+ production cuts and curbed flows from Iraq triggered a strong rally, lifting the price of WTI crude oil from a low of $64.12 to a high of $83.53 in the short span of three weeks.

The OPEC+ bombshell plan to curb production by 1.7 million barrels a day initially triggered a buying spree, with importers seeking to get ahead of the cuts which start in May. But caution returned to the market and traders are trying to gauge whether demand will be sufficient to sustain the latest rally.

The economy of China, which is the biggest crude oil importer in the world, grew by 4.5% in the first quarter of 2023 and the country’s oil refinery throughput rose to record levels in March. However, the data pointing to a rebound in the Chinese economy after its re-opening from Covid restrictions, did not manage to boost oil prices.

After reaching a high of $83.53 in early April, the OPEC+ output cuts inspired rally reversed course and crude oil prices have been falling sharply over the past six trading sessions. Traders are worried the potential interest rate hikes by the Federal Reserve could slow down growth and lower oil demand, which offsets the positive effects of falling U.S. inventories and the latest robust Chinese economic data.

Source: Tradingview

WTI crude oil has given up some of its OPEC+ supported gains over the past week as initial optimism have faded. Although crude oil has not erased all the gains from its March low, prices fell more than 7% from its recent high, which is the biggest decline since mid-March, as demand concerns are once again at the market’s forefront.

The latest IMF global economic projections reveal the slowdown effects of the aggressive monetary tightening by central banks. Until oil fundamentals begin to replace macro fears the short-term upside for oil is likely to be limited.

China’s reopening and OPEC+ oil production cuts have raised expectations for higher oil prices; however, risk appetite has been dampened and traders are looking for signs of an improvement in demand.

Despite the current pullback, crude is still well above its March low, and it appears the consolidation over the past five months might be part of a base formation process. The recent break of the Relative Strength Index above its ten-month resistance shows an improvement in the momentum conditions, which suggests that the down trend from the March 2022 high may have already bottomed.

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