SCO - Oil prices seen pushing higher in H2 on supply deficit lack of U.S. shale output

2023-05-19 19:50:41 ET

Crude oil posted its first weekly gain since early April, tracking broader market sentiment that supported risk assets on the rising belief that the U.S. will avoid a default, although prices slipped on Friday as debt-ceiling talks paused unexpectedly.

But oil's upside is likely to remain limited as long as worries persist surrounding a looming recession in the U.S. and until China's economy can provide evidence of a broader and more resilient recovery.

Front-month Nymex crude oil ( CL1:COM ) for June delivery +2.1% for the week to $71.55/bbl, and front-month July Brent crude ( CO1:COM ) +1.9% on the week to $75.58/bbl, with both benchmarks snapping four-week losing streaks.

ETFs: ( NYSEARCA: USO ), ( BNO ), ( UCO ), ( SCO ), ( DBO ), ( USL ), ( DRIP ), ( GUSH ), ( USOI ), ( NRGU )

U.S. natural gas futures ( NG1:COM ) ended sharply higher for the week, +14.1% to $2.585/MMBtu, with analysts attributing the spike to a smaller than forecast increase in U.S. inventory and signs of a slowdown in domestic production.

Oil prices will reclaim the $80/bbl level in this year's H2 and could continue rising toward $90 due to a deepening supply deficit caused by OPEC's production cuts and the lack of response from U.S. shale, Francisco Blanch, head of commodities research at Bank of America, said this week.

"Demand will eventually turn around and get a little better in the developed markets, [and] start to push inventories lower again into the year-end and into 2024, and that's what gets you higher in terms of prices," Blanch said.

The U.S. oil rig count, an indicator of future production, fell by 11 to 575 this week, the biggest weekly drop since September 2021 , Baker Hughes reported Friday; this week's drop in oil rigs follows the previous week's decline in natural gas drilling rigs by the fastest pace in seven years.

Energy stocks ( NYSEARCA: XLE ), as indicated by the Energy Select SPDR ETF, closed the week +1.4% , but the group is still -6.5% for the month, well behind the other 10 S&P sectors on the May leaderboard.

Top 5 gainers in energy and natural resources during the past 5 days: ( NASDAQ: ADSE ) +87.2% , ( AMTX ) +79.9% , ( HTOO ) +31.6% , ( EPOW ) +21.7% , ( DKL ) +16.4% .

Top 5 decliners in energy and natural resources during the past 5 days: ( NRT ) -26.7% , ( CGAU ) -20.4% , ( SKE ) -17% , ( IAG ) -14.5% , ( SA ) -12.3% .

Source: Barchart.com

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