Geopolitical Tensions Keep Oil Prices Elevated

In the complex mix of elements influencing crude oil prices, recent events have focused attention on June West Texas Intermediate (WTI) futures. The interplay of ongoing inflation, geopolitical tensions, and Federal Reserve policy decisions is molding the behavior of the market.

Geopolitical Risks and Oil Prices

Recent events have underscored the significant impact of geopolitical risks on oil pricing. The tensions between Iran and Israel, alongside the ongoing Ukraine-Russia conflict, have maintained crude prices near six-month highs. For instance, West Texas Intermediate crude witnessed a fluctuation, with prices settling lower on Thursday but remaining elevated due to these tensions. The price action has positioned WTI for a potential weekly loss, its first in three weeks.

In more specific terms, U.S. crude and the global benchmark have seen a decrease of about 1.8% and 1.4%, respectively, this week. These movements illustrate the market's sensitivity to geopolitical developments, yet traders have shown resilience to these risks, only reacting strongly to immediate escalations.

Impact of US and Global Politics

The geopolitical canvas is further complicated by the situation in Gaza. The Wall Street Journal reported concerns about the fate of Israeli hostages held by Hamas, adding another layer of uncertainty. This development, coupled with Ukraine’s recent drone strikes on Russian oil refineries, has implications for the global energy scenario. Such incidents, while not directly disrupting oil supply, create an environment of uncertainty that can sway oil prices.

US Defense Secretary Lloyd Austin's comments on the strategic implications of Ukrainian drone strikes indicate a cautious approach by the U.S., mindful of the broader impact on global energy markets. Such geopolitical maneuvers and their interpretations by market players are critical in shaping oil price trends.

Economic Indicators: Inflation and Federal Reserve Policies

Turning to the economic front, the U.S. Federal Reserve's monetary policies are a pivotal factor in the oil market. The Fed’s minutes reveal concerns about stalled progress on inflation control, suggesting a potentially longer period of tight monetary policy. This shift in expectation affects the oil market as it influences demand and investor sentiment. The CPI data showed an acceleration to a 3.5% annual rate in March, up from 3.2% in February, reinforcing concerns about persistent inflation.

These inflationary pressures and the Federal Reserve’s response, which now leans towards delayed interest rate cuts, play a crucial role in shaping market expectations. Investors, who previously anticipated a rate cut as early as June, are now looking towards September. Such a delay in rate cuts can have a cooling effect on oil demand, thus influencing prices.

Weekly Technical Analysis

Weekly June WTI Crude Oil

Trend Indicator Analysis

The main trend is up, surging the previous week to its highest level since the week-ending June 17, 2022. This week, has produced an inside trading range. This chart pattern indicates a number of things including trader indecision and impending volatility.

Some also view it as a signal for a transitioning period between bullish to bearish. I think it indicates that traders are waiting for news, giving them the choice to chase it higher or play for a pullback. Either way, the market is well supported with a strong support base between $71.47 and $69.08.

Retracement Level Analysis

The contract range is $39.16 to $88.15. Its retracement zone at $63.66 to $57.87 is the major support zone. This area stopped the selling the week-ending May 5, 2023 at $65.65. This is a major long-term value zone.

The intermediate range is $62.65 to $86.83. Its retracement zone at $74.74 to $71.89 is support.

The minor range is $69.08 to $86.83. Its retracement zone at $77.96 to $75.86 is another value zone.

Weekly Technical Forecast

The direction of the June WTI crude oil market the week-ending April 19 is likely to be determined by trader reaction to the short-term Fibonacci level at $86.10.  

Bullish Scenario

A sustained move over $86.10 will signal the presence of strong buyers. If this creates enough near-term momentum then we could see an acceleration to the upside with the main top at $88.15 the next target. This is a potential trigger point for an acceleration to the upside and could put $100 a barrel on the radar.  

Bearish Scenario

A sustained move under $86.10 will indicate the presence of sellers. This could drive the market into the short-term retracement zone at $79.15 to 77.33. Holding this area could create a rangebound trade. Bullish traders are likely to read a break back into this area as a gift since it is also a value zone.

Short-Term Market Forecast

Considering the fundamental factors currently driving the price action, the short-term outlook for the oil market appears bearish. The market's capacity to sustain high oil prices in the latter half of the year seems increasingly challenged by several factors: potential non-OPEC supply growth, a significant amount of OPEC+ spare capacity re-entering the market, and the impact of continued inflation on demand.

The geopolitical risks, currently bolstering prices, may not sustain this uplift without actual supply disruptions. Given the market's adaptive resilience to geopolitical news, the absence of significant escalatory developments might lead to a reduction in the risk premium currently underpinning prices.

In conclusion, the intersection of geopolitical volatility, inflation concerns, and changing Federal Reserve policies suggests a cautious, bearish outlook for the oil market in the short term. Market trends in the coming weeks and months will likely be influenced significantly by these evolving factors, necessitating a vigilant and adaptive approach for investors and stakeholders in the oil industry.

Technically, this week’s inside move could be indicating a shift in sentiment. While we don’t expect the long-term trend to turn down, we do acknowledge that there is room to the downside for a meaningful correction.