Upward movement initiated, yet on shaky ground

WTI edged higher for the second week in a row, surpassing $73 per barrel at some point, yet the slight bullish movement seems to remain unconvincing for now. Prospects for future demand and production levels seem to remain in the epicenter of attention for market participants, guiding the market sentiment and oil prices. In this report, we aim to shed light on the factors driving WTI’s price, assess its future outlook and conclude with a technical analysis.

US oil market suddenly turns tight

Since the beginning of the week, there were rumors in the oil market that the US oil market is to be tightening. Despite the rumors, we have to note that on Friday, the Baker Hughes oil rig count showed that the number of active oil rigs in the US dropped even further reaching 575, the lowest in about a year, implying reduced demand. On the other hand though, we had a complete reversal of the increases in US oil reserves and its characteristic that API reported a drawdown of -6.8 million barrels while EIA showed an even wider drawdown of almost -12.5 million barrels in a sign that the oil production in the US was not able to reach and surpass demand levels. The reduction of US oil inventories and especially the size of the drawdowns reported, was characteristic of how tight the US oil market got over the past ten days. Overall, we expect the tightness of the US oil market seemed to provide some support for oil prices and should it be maintained we may see oil prices rising further.

Demand side worries intensify

Oil participants tend to maintain their worries for the demand outlook of the commodity especially as market worries for a possible default of the US on its debt seem to intensify. It should be noted that Republican lawmakers are to leave for a long weekend today, which lowers the chances for an agreement between the White House and the House of Representatives in the next few days. Nevertheless, House Speaker McCarthy stated that he could get a deal on raising the Debt ceiling “in principle” by this weekend. Please note that the ongoing negotiations and the lack of common ground, caused Fitch to place the US “AAA” rating under credit watch negative. The development intensified market worries further and understandably oil traders fear for the possible adverse effect such a scenario may have on oil prices. Furthermore the news that Germany a key industrial economy that still consumes a considerable amount of oil fell into a recession even a technical one, tended to intensify market worries for the demand side of the economy. It should be noted that the contraction of economic activity in Germany’s manufacturing sector over the past 10 months may enhance such worries which in turn may weigh on oil’s price.

OPEC’s warnings

Last but not least we could not miss out on Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman. The Saudi Minister warned practically oil short sellers that the OPEC meeting is looming at the beginning of June, implying of the oil-producing cartel’s ability to cut oil production levels and thus raise oil prices. Market worries for further oil production tightening were mitigated though on Thursday as Russia’s Energy Minister Novak stated that he does not expect the OPEC to reduce oil production levels further in its next meeting.

التحليل الفني

WTI Cash 4H Chart

• Support: 72.80 (S1), 67.80 (S2), 61.50 (S3)
• Resistance: 77.70 (R1), 83.35 (R2), 86.25 (R3)

WTI seems to maintain its upward motion over the past week, breaking the 72.80 (S1) resistance line, now turned to support. The upward trendline guiding the commodity’s price since the 15^th of the May, remains maybe the main indication of a bullish outlook for WTI, aside from the fact that the price action has broken the 72.80 (S1) level, a level that held its ground against the upward pressure of the commodity’s price action a couple of times and is providing some support right now, verifying its reversal to a support level. The RSI indicator on the other hand seems to be telling a different story as it runs along the reading of 50, implying a rather indecisive market. As long as the price action remains above the prementioned upward trendline, we intend to maintain our bullish outlook, yet at the same time, we send also a word of warning for a possible stabilisation of WTI’s prices. Should the bulls maintain control over the commodity’s price action we set as the next possible target for the bulls the 77.70 (R1) resistance line. Should the bears take over, a possibility that seems to be more remote now yet should not be excluded, we may see WTI’s price reversing course, breaking the 72.80 (S1) support line, breaking also the prementioned upward trendline, in another sign that the upward movement has been interrupted and aim if not reach for the 67.80 (S2) support barrier.  

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.

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