Oil Outlook: Market looks for direction

WTI’s price seems to have stabilized somewhat over the past week. Currently, we tend to focus on the situation of the US oil market and also keep an eye out on the situation in the Red Sea and the demand side of the oil market with special focus being on China. 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 slack in the US Oil market

We make a start with the state of the US oil market and particularly by the observation that the Baker Hughes report showed that the number of active oil rigs in the US seems to be increasing. The release signaled potentially increased demand in the US, which could provide some support for oil prices should the increase of active oil rigs continue in the coming week as well.

On the other hand, note that API reported another increase of US oil inventories, this time by 8.4 million barrels, a number even larger than last week’s 7.2 million barrels, implying that the rate of increase of oil inventories accelerates.

Similarly also the EIA reported a wider increase of inventories if compared to the prior reading. EIA reported an increase of US oil reserves by 4.2 million barrels. In both cases the depiction of the slack in the US oil market, given that production levels surpassed aggregated demand in the US for a 5th week in a row. Should the slack in the US oil market continue or even widen, we may see the oil prices being set under pressure.

The Red Sea and OPEC

On the supply side of the international oil market, we note that the tensions caused by the Houthi at the Red Sea are still ongoing, causing uncertainty about the outlook of the area and the supply of oil. Yet the market seems to have largely priced in the situation and alternative routes seem to be currently filling in the gap for the supply of oil. Hence should there be no substantial escalation in the tensions in the region, we expect the issue to play little role in determining the direction of oil prices.

Similarly also the Israeli-Palestinian conflict seems to fail to near a solution yet has been largely priced in by the market. Please note that hopes for an extended ceasefire for the Ramazan seem to have lowered in the past few days, as extensive differences between the two sides are still present. On the other hand, the OPEC+ group seems to keep the supply side of the international oil market in a tight condition which in turn may keep prices supported.

In addition to that, we also note that the oil-producing group seems to expect increased oil demand despite the growth of renewables. Should market expectations for a possible tightness of the supply side of the international oil market be maintained we may see oil prices getting some support.

Worries for China’s demand

Despite OPEC’s expectations for increased demand, we tend to note our worries for the demand side of China. We note the release of China’s manufacturing PMI figures for February tomorrow during the Asian session. The release is expected to show that Chinese factories are still struggling to keep economic activity afloat and if actually so, it could send a negative signal for the demand side of the international oil market, weighing on oil prices, given that China remains one of the main consumers.

Oil: Technical Analysis

WTI Cash H4

• Support: 75.00 (S1), 70.00 (S2), 66.85 (S3)
• Resistance: 79.15 (R1), 84.30 (R2), 85.35 (R3)

WTI’s price has stabilised since our last oil report, moving in the corridor formed by the 79.15 (R1) resistance line and the 75.00 (S1) support level. We tend to maintain our bias for the sideways motion to continue for the time being given also that the RSI indicator remains above but close to the reading of 50. For a bullish outlook, we would require the liquid gold’s price to break the upper boundary of its current sideways motion, namely the 79.15 (R1) resistance line and take aim at the 84.30 (R2) resistance hurdle, which has not experienced any price action since the end of October last year.

For an extremely bullish scenario, we would note the 85.35 (R3) resistance barrier. Should on the flip side the bears find a chance to take over, we may see the commodity’s price breaking the 75.00 (S1) support line and aim for the 70.00 (S2) support base. Even lower we note the 66.85 (S3) support level which had formed a floor for WTI’s price action in late May/early June last year.

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