Oil prices slid overnight after a very bullish read on US inventories when US Fed Chair Jerome Powell threw a wet blanket on the grand reopening trade after making it unambiguously clear that there will not be a V-shape recovery.

But oil demand is recovering in a more V-shaped fashion than macroeconomic data. As economies carry on with restarting activity, albeit at a measured pace, and OPEC shows a more significant commitment to supply discipline, oil prices will show further upside momentum.

But momentum will happen in fits and starts until there is at minimum some therapeutic solution for the virus.

Fed’s Powell comments should not have been that negative for oil.

However, in a market still shaken by secondary spreader fears and with the thought of inland storage saturation issues still fresh in most investors’ minds. Weaker hands bailed while others were more than willing to step in front of the sell-off at a 200-day moving average (200 DMA), which has been an enduring characteristic of this nascent oil rally.

Broader markets are focusing on the debate between the divergence between Main Street and Wall Street, but the discussion for prompt oil should be on near term supply and demand, not what happens in Q4.

And then you had the CFTC issuing a rare warning to brokers, exchanges, and clearinghouses, basically telling them to roll or cut position or stand ready for the risk that oil prices could again drop below zero at roll time.

Of course, traders pay little heed to the CFTC, but risk managers do. In the era of limited risk-taking adventures at large financial institutions, risk managers, not traders call the shots which could have influenced some position squaring on the first contracts.

Cutting through the noise

US stockpiles decreased by 745,000 barrels in the week through May 8, according to the US Energy Information Administration, compared with a 4.15 million-barrel build that analysts surveyed by Refintiiv were anticipating.

In regular times this read would have been very bullish for oil if it were not for Powell’s comments and Dr Fauci’s guidance yesterday as bullish investors were forced to ride over the back to back potholes on the road to recovery.

After a deeper dip than expected post-Powell, Oil prices have recovered but are not firing higher.

So far, Saudi Arabia’s indication this week alongside its GCC allies to cut additional production further does not seem to have impacted prices. The market seemingly moves between getting more constructive on improving market fundamentals looking beyond mid-year. Near term concerns of the inventory rise still, weigh but are gradually moving to the background.

But the ongoing adverse effects of the potential re-occurrence of coronavirus outbreaks continue to limit upside ambitions. Its shaping up to be one of those knock-down-drag-out battle of bulls and bears as the tug of war between improving fundamentals matches up against secondary spreader fears.

Whatever happens in 2Q and there continue to be risks of another significant leg down for oil, especially if a secondary spreader hits.

But OPEC+ continues to signal a willingness to do what is necessary to stabilise the oil price and that should limit downside. Evidence of proper compliance with the new agreement will be significant.

Still, it is evident to all that the stakes are high so that compliance commitment will remain firm, and more short-term voluntary cuts could be in the offing.

Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp