A Signal of Strong Short Term Demand in Oil Markets

This week, crude oil prices are inching higher, primarily driven by concerns over tightening supply. As of the latest trading sessions, April West Texas Intermediate (WTI) crude oil futures are showing an increase, currently up by 0.19% for the week. This rise, when compared to the stability or fluctuations in previous weeks, highlights a growing concern among traders. They are actively watching for a potential breakout above the January 29 main top of $79.09, indicating a bullish sentiment in the market due to these supply concerns.

Spot vs. Futures Premium: A Bullish Indicator

A significant development this week is the increasing premium of spot prices over near-date futures. This widening gap, now more pronounced, signals a strong demand outlook in the short term. Contracts linked to near-term deliveries are reaching their highest premium in months. By providing specific figures or a comparison to previous months, readers can better grasp the market's current state, which suggests a bullish outlook for crude oil due to robust immediate demand.

Refinery Recovery Enhancing Demand

The resurgence of U.S. refineries is boosting demand for crude oil. Operations at BP's Indiana refinery and TotalEnergies’ Port Arthur refinery are improving, which is expected to elevate U.S. refinery run rates from 80.6% to 81.5%, according to a Reuters poll. This improvement in refinery operations, crucial for converting crude into usable products, is a bullish signal for crude oil futures, indicating an increase in demand for crude as a feedstock.

Inventory Levels: A Mixed Influence

The latest U.S. oil inventory data from the Energy Information Administration (EIA) reveals a complex picture. Contrary to market expectations, there was an unexpected rise in crude stocks. The EIA reported an increase of 3.5 million barrels to 442.9 million barrels for the week ending February 16, compared with analysts' expectations of a 3.9 million-barrel rise. This increase in inventories, typically a sign of lower demand or higher production, could restrain gains in crude oil prices, presenting a bearish factor in the short term.

The Weakening Dollar Supporting Prices

The weakening U.S. dollar is also playing a role in supporting crude prices. As the dollar loses strength, oil becomes more affordable for holders of other currencies, potentially boosting demand. This factor is generally bullish for crude oil futures, as it can lead to increased global demand. However, the outlook for the greenback is uncertain due to mixed signals over Fed policy. As of Thursday’s close, traders were still debating whether the Fed will initiate its first rate cut in May or June. This uncertainty is causing volatility in the Treasury markets, which could spill over to the U.S. Dollar. Generally, a rise in Treasury yields could support the U.S. Dollar and consequently weigh on foreign demand for U.S. crude. Conversely, lower yields will weaken the dollar and could drive up demand for U.S. oil.

Middle East Tensions: A Persistent Concern

Ongoing hostilities in the Red Sea, particularly the Iran-aligned Houthis' attacks near Yemen, are raising supply concerns. The persistent tensions in the Middle East are a critical factor, posing a risk to supply stability. Such geopolitical risks are typically bullish for crude oil prices due to the potential for supply disruptions.

European Supply Challenges

Supply issues in Europe, such as political events or production disruptions, are increasingly impacting the U.S. market. European supply challenges could lead to a higher demand for U.S. gasoline and diesel, potentially tightening the U.S. market. This situation is bullish for crude oil futures, as it suggests a shift in supply patterns that could elevate demand for U.S. oil products.

Weekly Technical Analysis

Weekly April WTI Crude Oil

Trend Indicator Analysis

The main trend is down according to the weekly swing chart, but the minor trend is up. This divergence is helping to create the two-sided price action. We essentially have the short-term traders reacting to a volatile news situation, while the longer-term traders are capping gains by selling rallies based on their interpretation of the fundamentals.

A trade through $79.09 will change the main trend to up. A move through the new main bottom at $71.49 will signal a resumption of the downtrend.

Retracement Level Analysis

The contract range is $38.90 to $89.19. Its retracement zone at $64.05 to $58.11 is the major support zone. This area stopped the selling the week-ending March 27, 2023 at $65.00 and the week-ending June 16, 2023 at $65.41. This is a major long-term value zone.

The intermediate range is $58.85 to $89.19. Its retracement zone at $77.10 to $79.95 is resistance. The market is currently testing this area.

The minor range is $65.00 to $85.75. Its retracement zone is $75.38 to $72.93. Based on this week’s price action, this zone is new support.

The market has been straddling both the intermediate and minor retracement zones for nearly a year.  

Weekly Technical Forecast

The direction of the April WTI crude oil market the week-ending March 1 is likely to be determined by trader reaction to the intermediate 50% level at $77.10.

Bullish Scenario

A sustained move over $77.10 will signal the presence of strong counter-trend buyers. If this creates enough near-term momentum then look for the counter-trend rally to continue into the main top at $79.09. Taking out this level will change the main trend to up with $79.95 the next target. This 61.8% level appears to be the trigger point for an acceleration to the upside.

Bearish Scenario

A sustained move under $77.10 will indicate the presence of sellers. This could drive the market into the minor retracement zone at $75.38 to $72.93.

Short-Term Forecast

Looking ahead to next week, the current events are likely to continue influencing crude oil prices. The tightening supply, indicated by the spot vs. futures premium and refinery recoveries, suggests a bullish outlook. However, the recent inventory data from the EIA, showing an unexpected rise in crude stocks, introduces a bearish element that could temper the bullish sentiment.

The ongoing situation in the Middle East remains a critical factor. Any escalation in tensions could lead to supply disruptions, likely pushing prices higher. Conversely, signs of easing tensions could alleviate some of the supply concerns.

The impact of the weakening dollar will also continue to play a role. If the dollar continues its downward trend, it could further bolster demand for crude oil, supporting higher prices. However, the direction of the greenback could be dependent on Fed policy and the direction of interest rates.

In summary, the short-term forecast for crude oil futures is cautiously bullish, with a close eye on inventory levels and Middle East developments. Traders should stay alert to these key indicators as they make trading decisions in the coming week.

Technically speaking, next week’s trade will be all about whether bullish traders can sustain a rally over the late January top at $79.09 and create enough upside momentum to overcome $79.95 with conviction.