A Battle Between Fundamental And Technical Oil Traders

U.S. West Texas Intermediate crude oil futures rebounded slightly on Thursday, but the market is still in a position to post a nearly 5% loss for the week.

Bottom-picking technical traders likely stopped the decline after the October futures contract tested a seven-month low and a key Fibonacci support level at $81.85. Fundamentally, counter-trend buyers took notice of Russia's latest threat to halt oil and gas exports to some buyers.

Surprisingly, prices rose despite an unexpected build in U.S. crude inventories, news that the United States was weighing the need for more crude releases from strategic reserves, and concerns China's strict COVID-19 lockdown extensions and rising global interest rates would slow economic activity and hit worldwide fuel demand.

China's Trade Loses Steam as Demand Wanes at Home and Abroad

Crude oil prices got off to a shaky start early Wednesday after a report showed China's exports and imports lost momentum in August with growth significantly missing forecasts as surging inflation crippled overseas demand and fresh COVID curbs and heatwaves disrupted output, reviving downside risks for the shaky economy.

The disappointing August trade figures rattled the crude oil market, which had already been buckling under a surging U.S. Dollar and the prospect of higher global interest rates.

Global Central Bank Tightening to Continue, but Dollar Remains King

Several world central banks are slated to keep hiking rates to fight inflation, but the United States appears better placed to weather the storms, economists have said. That has boosted the dollar to a 24-year peak against the Yen and a 37-year high versus the Sterling.

The rising U.S. Dollar is not necessarily a good thing for crude prices. The stronger greenback pressures oil prices since the commodity is a dollar-denominated asset.

Sellers Shrug-Off Mixed Signals

On the bullish side, U.S. crude production and petroleum demand will both rise in 2022 as the economy grows, the U.S. Energy Information Administration (EIA) said in its Short-Term Energy Outlook (STEO) on Wednesday.

Additionally, top oilfield services company Schlumberger on Wednesday said North American oil and gas activity was growing at a faster pace than expected, as customers have largely shrugged off concerns about a looming recession.

But not everyone is on the side of the EIA and the Schlumberger executive, "U.S. oil output this year is likely to disappoint, with even lower growth possible next year," said Scott Sheffield, chief executive of leading shale producer Pioneer Natural Resources.

Sheffield forecasts that U.S. oil production will rise by around 500,000 barrels per day (bpd) this year, and next year's gains could fall below that level. His estimate is well below the 800,000 bpd projection for 2023 by the U.S. Energy Information Administration (EIA).

"There could be more downside," he said on Wednesday at Barclays CEO Energy-Power Conference in New York, pointing to supply chain issues, inflation, and infrastructure constraints.

Mixed Supply Signals

U.S. crude stockpiles surged by nearly 9 million barrels the week ending September 2 due to a combination of increased imports and ongoing releases from government emergency reserves, the Energy Information Administration (EIA) said.

The huge build in the EIA figures compares with the 250,000-barrel draw analysts forecast in a Reuters poll and data from the American Petroleum Institute (API) industry group showing a 3.6 billion barrel increase.

Additionally, U.S. Energy Secretary Jennifer Granholm said Joe Biden's administration was weighing the need for further releases of crude oil from the nation's emergency stockpiles.

While the U.S. is talking about making more supply available in an effort to drive down prices, Russian President Vladimir Putin's threat to halt oil and gas exports if price caps are imposed by European buyers, provided some support for prices.

Weekly Technical Analysis

Weekly October WTI Crude Oil

Trend Indicator Analysis        

The main trend is down. It turned down earlier this week when sellers took out the previous weekly main bottom at $85.37. The next main bottom comes in at $61.08. A trade through $97.66 will change the main trend to up.

Retracement Level Analysis

The main range is $61.08 to $115.44. The market is currently testing its retracement zone at $88.26 to $81.85.

The contract range is $35.25 to $115.44. Its retracement zone at $75.35 to $65.88 is the next major downside target and potential value area.

Weekly Technical Forecast

The direction of the October WTI crude oil market in the week ending September 16 will be determined by trader reaction to the main 61.8% level at $81.85.

Bullish Scenario

A sustained move over $81.85 will indicate the presence of buyers. If this move creates enough upside momentum then look for a rally into the 50% level at $88.26. This is a potential trigger point for an acceleration to the upside.

Bearish Scenario

A sustained move under $81.85 will indicate the presence of sellers. This could trigger a steep break into the contract's 50% level at $75.35. Since this level represents value, look for a technical bounce on the first test of this level. If it fails then look for a possible acceleration into the contract's 61.8% level at $65.88.

Short-Term Outlook

Friday's price action suggests there may be a short-term battle brewing between technical and fundamental traders.

Technically, some traders are reading the charts and seeing an oversold market. Others are seeing value as the market tests key long-term retracement levels.

Fundamentally, the bears are focusing on a global recession which would be a demand killer and an Iran Nuclear Deal that will bring more oil to the market. Meanwhile, the bulls are looking at Putin's threat to pull more oil from the market. However, I believe the key to stopping the price slide will be OPEC+.

OPEC+ symbolically cut output by 100,000 barrels per day in October on Monday. The market took notice for about an hour. Was it a threat or was it an attempt to put a floor in the market?

If prices continue to slide, then look for OPEC+ to announce emergency production cuts in an effort to shore up prices.