Oil Outlook: WTI’s upward movement interrupted

Since last report ,WTI’s upward movement was interrupted on Tuesday, with the movement of the commodity’s price action being wide, in an indication of the sensitivity of the oil market to its fundamentals. In today’s report we have a look at the state of the US oil market, the situation in the Middle East, hurricane Milton’s possible effects and the demand side of the international oil market. The report is to be concluded with a technical analysis of WTI’s daily chart. 

Slack in the US oil market

We make a start with the data for the US oil market since our last report, by noting that the Baker Hughes oil rig count dropped for a second time last Friday, this time by five oil rigs indicating that the number of active oil rigs contracted to 479.

The release tended to imply a slack in the US oil market, yet passed relatively unnoticed by oil traders. Signals for a slack in the US oil market intensified on Tuesday as the American Petroleum Institute reported a substantial increase of US oil inventories, this time by 10.9 million barrels.

The slack in the US oil market was reaffirmed also by the EIA on Wednesday, as it also reported an increase in US oil inventories. Should we see further signs of a widening slack in the US oil market we may see the data weighing on oil prices as the demand levels in the US oil market would lower than oil production.         

Hurricane Milton to hit Florida

Hurricane Milton has made landfall on Sarasota Florida today and is unleashing its fury. The hurricane has left million in Florida without power and millions have fled their home in search of safety. At least one oil and gas platform in the U.S. Gulf of Mexico was shut on Monday.

Most energy facilities and infrastructure on the U.S. Gulf Coast, including WTI and gas production facilities, liquefied natural gas (LNG) plants and refineries, is expected to be out of the storm path, but the closure of terminals could temporarily disrupt exports and imports as per Reuters.

For the time being we see the case for a disruption of operations in the area, yet we expect it to be temporary, unless hurricane Milton proves to be more destructive than expected. Hence any potential bullish push for WTI prices, underpinned by the hurricane fundamentals may prove to be time limited. 

The situation in the Middle East

Despite a possible easing of market worries in the Middle East, the situation is still tense. It should be noted that efforts for a possible ceasefire intensified since the start of the week, weighing on oil prices.

However we expect any efforts for a ceasefire to fall through and Israel to respond to Iran’s missile attack. The harder the attack of Israel on Iran, the more support oil prices may get. The question now also arises, on how Iran will respond to the Israeli attack, as such a market worries could provide an extension of market worries.

One scenario would be a possible closure of the Hormuz straits or an Iranian hit on oil facilities of neighbouring Arab states. In such a scenario OPEC may not be able or have a delay in covering for the lost Iranian oil production levels which could create a violent movement upward higher for oil prices.

On the other hand, should the situation start de-escalating, possibly with Israel choosing softer Iranian targets, we may see oil prices weakening. 

Oil Technical Analysis

WTICash Daily Chart

• Support: 71.15 (S1), 68.00 (S2), 64.70 (S3)
• Resistance: 75.50 (R1), 78.70 (R2), 82.10 (R3)

WTI’s went through a roller coaster ride in the past week, landing between the 71.15 (S1) support line and the 75.50 (R1) resistance level.

On a technical basis and for the time being we see the case for the commodity’s price action to maintain sideways motion, given that on Tuesday it broke the upward trendline guiding it since the 1  of the month, but the following day the 71.15 (S1) support line halted the drop. Furthermore the RSI indicator tends to remain above but close to the reading of 50, implying some uncertainty among oil traders for the direction of the commodity’s price action. The bar for a change of trend is high in both directions.

For a bullish outlook we would require WTIs’ price to form a higher peak than the last one. Hence the price action has to break the 75.50 (R1) resistance line and reach as high as the 78.70 (R2) resistance barrier. Should the bears take over, we may see WTI’s price action breaking the 71.15 (S1) support line and aiming if not reaching the 68.00 (S2) support level.

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