Oil Outlook: Bulls get cold feet?

WTI bulls seem to hesitate to advance higher despite a good run higher since our last report. For the time being we intend to focus on the conditions dominating the US oil market and also keep an eye out on the situation in the Red Sea and the competition on a production level between OPEC and Angola. 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 continuation of the slack in the US oil market

We note that the number of active oil rigs in the US, continued to rise according to Baker Hughes late last week, in a signal that demand remains resilient in the US oil market. On the other hand we note that API showed another rise of US oil inventories yet only marginal as the increase reported is of only 432k barrels, a far cry from prior reading of 8.425 million barrels. It should be noted that it’s the 5th weekly increase of US oil reserves reported by API. Similarly also EIA reported another increase of US oil reserves for the past week, this time of 1.367 million barrels, less than the 2.4 million barrels expected.

Yet a rise in US oil inventories is a rise and is indicative of production levels surpassing aggravated demand once again. The data tend to indicate a continuation of the slack characterising the US oil market and could be clipping any gains for oil’s price. To make matters worse, we also note that the ISM manufacturing PMI figure dropped more than expected, implying a deeper contraction of economic activity in the US manufacturing sector, which in turn could imply even less demand for oil in the US oil market.

At he same time on a monetary level, despite Fed Chairman Powell acknowledging the need for a rate cut in the current year in his testimony before the US Senate, the Fed seems to hesitate to cut rates as its worries are not to start cutting rates too early than too late. Tight financial conditions in the US economy may also keep economic activity at lower levels and thus add more pressure on oil prices. On the flip side, a weak dollar could provide some support for oil prices.

Houthis, OPEC and Angola

On the supply side of the international oil market, we note that tensions in the Red Sea and the Gulf of Aden are still high with Houthi rebels attacking another ship this time killing two members of a cargo ship. The tensions tend to stoke uncertainty in the international oil market and thus have a bullish effect on oil prices as the oil supply is under threat.

Also supporting oil prices were the announcements of several OPEC+ member countries that they would extend additional voluntary cuts of 2.2 million barrels per day (bpd) in the second quarter of the current year. According to OPEC that would be “ These additional voluntary cuts are announced by the following OPEC+ countries : Saudi Arabia (1,000 thousand barrels per day); Iraq (220 thousand barrels per day); United Arab Emirates (163 thousand barrels per day);

Kuwait (135 thousand barrels per day); Kazakhstan (82 thousand barrels per day); Algeria (51 thousand barrels per day); and Oman (42 thousand barrels per day) for the second quarter of 2024. Afterwards, in order to support market stability, these voluntary cuts will be returned gradually subject to market conditions.

The above will be in addition to the announced voluntary cut by the Russian Federation of 471 thousand barrels per day for the same period”. On the other hand Angola seems about to increase its oil production levels, yet it remains doubtfull if it could cover the gap created by OPEC members. Nevertheless, IEA expects oil production to rise to record highs driven primarily if not entirely by producers outside OPEC+ including the United States, Brazil and Guyana.

Oil: Technical Analysis

WTI Cash H4

• Support: 75.00 (S1), 68.10 (S2), 64.10 (S3)
• Resistance: 80.20 (R1), 84.35 (R2), 89.60 (R3)

WTI price action seems to be pointing upwards yet at the same time seems to have hit a ceiling at the 80.20 (R1) resistance line. Nevertheless, we tend to maintain a bullish oil outlook for the commodity’s price, yet note the stabilisation tendencies, as the price of black gold seems to have a difficulty to form higher highs and the RSI indicator remains above yet close to the reading of 50, implying a rather indecisive market.

Should the bulls maintain control over the price action of WTI, the 80.20 (R1) has to be broken and the gates for the 84.35 (R2) resistance level to be opened. Even higher we note the 89.60 (R3) resistance hurdle. On the flip side, should the bears take over, we may see the commodity’s price breaking the 75.00 (S1) support line and aim for the 68.10 (S2) support base. For an extreme bearish scenario we note the 64.10 (S3) support barrier that was briefly tested on the 4th of May last year.

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