Oil Outlook: Bears ease off the pedal

WTI’s appears to have reversed course since last week and now appears to be moving in an upwards fashion. Currently, we tend to focus on the situation of the US oil market and also keep an eye out on China, as well as the international supply side of the oil market. In this report, we aim to shed light on the catalysts driving WTI’s price, assess its future outlook and conclude with a technical analysis

Oil: Overview Report

The situation in the US oil market

We note last week’s comment about the problems in the supply side of the US oil market given the continuation of the extreme cold weather phenomena. The Baker Hughes Oil rig count, remained stable at four hundred and ninety-nine implying that last week’s increase in the number of active oil rigs by two, appears to be satisfying current demand. API on the other hand, seemed to partly validate that hypothesis, by reporting on Tuesday, an increase in oil inventories, implying that production was able to catch up and exceed demand, which may suggest that the US oil market may be loosening.

Yet the increase in oil inventories, was lower than what was expected, coming at zero point six four seven million barrels which may have mitigated the downward pressures exerted on oil’s price. However, the EIA report, which was released a day later, reported a significant increase in oil inventories by five point five two zero million barrels, vastly exceeding expectations of one point seven million barrels. The figure may be implying a reduction in demand for oil or that supply is vastly exceeding demand. In conclusion, it would appear.

That the US oil production sector is exceeding demand, which according to the EIA peaked during December 2023 and is now expected to decrease slightly through the middle of 2024. Thus, potentially exerting downward pressures on oil prices for the first half of 2024.     

Chinese fortune cookies

On the demand side, we note that China’s PPI rate for January came in better than expected at -2.5% versus the expected rate of -2.6%. Yet, despite the better-than-expected PPI it is still in negative territory, implying deflation for Producer prices, for the past 16 months.

Moreover, the CPI rate for January came in lower than expected at -0.8%, indicating deflationary pressures which in turn may imply weakening demand within the Chinese economy.  As a result, the worrying economic situation in China could spark fears about future demand from the oil-guzzling giant. Therefore, should further financial releases hint at an economic deterioration, it could weigh on oil prices from a demand-side perspective.

The Middle East once again

On the supply side of the international oil market, we note that oil prices may have found some support, as the possibility of oil supply chain disruptions in the Middle East, appears to be on the rise. According to various news organizations, Israeli Prime Minister Netanyahu’s comments, appear to have been interpreted, as a sign that the conflict in the region is set to continue, which may have dampened trader’s hopes of easing tensions in the region.

Moreover, the Houthi Rebels appear to be hell-bent on disrupting trade via the Red Sea, by claiming to have struck US and UK ships in the region. Should these actions be officially acknowledged by the US and UK, it could lead to retaliation by US and UK forces, thus further disrupting the oil supply artery. Therefore, the possibility of the conflicts being prolonged well into 2024, may have provided a slight boost to oil prices.

Oil: Technical Analysis

WTI Cash H4

• Support: 71.60 (S1), 68.20 (S2), 65.05 (S3)
• Resistance: 75.25 (R1), 78.65 (R2), 81.65 (R3)

The commodity appears to have moved higher since last week, with it now taking aim for the seventy five point twenty five resistance level. We maintain a bullish outlook for the commodity and supporting our case is the crossover of the one hundred moving average line above the fifty moving average line, implying a switch towards a bullish market sentiment. Moreover, the RSI Indicator below our chart currently registers a figure above 60, implying bullish market tendencies.

For our bullish outlook to continue, we would like to see a clear break above the seventy five point twenty five resistance level, with the next possible target for the bulls being the seventy eight point sixty five resistance line.

On the other hand, for a sideways bias, we would like to see the oil remain confined between the seventy one point sixty support level and the seventy five point twenty five  resistance line. Lastly, for a bearish outlook, we would like to see a clear break below the seventy one point sixty support level, with the next possible target for the bears being the sixty eight point two zero  support base.

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