Don’t Expect A Major Rally In Oil

U.S. West Texas Intermediate crude oil futures rallied on Thursday, testing its high for the week amid optimism that that demand for fuel will grow in 2023. The move followed a more than 3% jump on Wednesday. Support was provided by concern over the impact of sanctions on Russian crude oil.

Providing a little resistance for buyers was a massive surprise build in U.S. crude stockpiles and caution over whether the Federal Reserve would use the slowdown in consumer inflation in December to slow the pace of interest rate hikes.

US Consumer Inflation Declines

U.S. consumer prices unexpectedly fell in December. The news pressured U.S. Treasuries and the U.S. Dollar, driving up demand by making dollar-denominated crude oil cheaper for foreign buyers.

The greenback tumbled after inflation data lifted expectations that the Federal Reserve will be less aggressive going forward with rate hikes.

Traders Bracing for Additional Curb on Russian Oil Supply

Crude oil price were also underpinned by traders bracing for an additional curb on Russian oil supply due to sanctions over its invasion of Ukraine.

The U.S. Energy Information Administration said the upcoming European Union ban on seaborne imports of petroleum products from Russia on Feb. 5 could be more disruptive than the EU ban on seaborne imports of crude oil from Russia implemented in December 2022.

Gains Limited by Sizable Jump in US Crude Oil Inventories

Limiting oil’s gains was a hefty and unexpected jump in U.S. crude oil inventories. Crude inventories rose by 19 million barrels in the week-ended Jan. 6 to 439.6 million barrels. Analysts polled by Reuters had expected a 2.2 million-barrel drop.

Weekly Technical Analysis

Weekly February WTI Crude Oil

Trend Indicator Analysis             

The main trend is down according to the weekly swing chart. A move through $91.19 will change the main trend to up. A trade through $60.05 will reaffirm the downtrend.

The minor trend is also down. A trade through $81.50 will change the minor trend to up. This will also shift momentum to the upside.  

Retracement Level Analysis

The contract range is $36.16 to $106.51. Its retracement zone at $71.34 to $63.03 is the next major downside target and value zone.

The short-term range is $91.19 to $70.31. Its retracement zone at $80.75 to $83.21 is resistance.  This zone helped stop the rally at $81.50 two weeks ago.

The minor range is $70.31 to $81.50. The market is currently trading on the strong side of its pivot at $76.79, making it support.

Weekly Technical Forecast

The direction of the February WTI crude oil market the week-ending January 20 is likely to be determined by trader reaction to the minor pivot at $76.79.

Bullish Scenario

A sustained move over $76.79 will signal the presence of buyers.  If this move creates enough upside momentum then look for a surge into the short-term retracement zone at $80.75 to $83.21.

Overtaking $83.27 will shift momentum to the upside and could trigger an acceleration to the upside with $91.19 the next major target price.

Bearish Scenario

A sustained move under $76.79 will indicate the presence of sellers. If this move creates enough downside momentum then look for the selling to possibly extend into the support cluster at $71.34 to $70.31.

A failure to hold $70.31 could trigger an acceleration to the downside with $63.03 the next major target price.  

Short-Term Outlook

WTI was edging higher ahead of Thursday’s CPI report as traders anticipated a weak number would spawn a slide in the dollar, with the reverse correlation driving up the bid in crude oil. Thursday’s strong rally proved they were right in their assumption. Essentially, crude oil is benefitting from the prospect of a slowdown in Fed rate hikes and a weaker U.S. Dollar.

Furthermore, the market appears to be underpinned by expectations of a softer landing for the U.S. or no hard recession. This, combined with a strong economic rebound in China following the current COVID wave, could make for a better year for prices than previously predicted by stimulating an unexpected surge in demand.

Although it is easy to get bullish on crude oil because of expectations of renewed demand in China, rising equities and a weaker U.S. Dollar, one has to strongly consider the odds of a meaningful rally, given the size of U.S. crude oil and refined products inventories. Unless U.S. supply tightens considerably, gains are likely to be limited, which means more rangebound trading over the near-term.