Oil May Not Go Higher Unless Supply Gets Disrupted

Weekly Performance Summary

This week witnessed varied movements in the crude oil market, driven by multiple factors. Oil prices dropped lower on Thursday, impacted by significant increases in gasoline and distillate stocks, which overshadowed a larger-than-expected crude stock decline.

However, overall, the market is slightly higher for the week as we head into Friday’s action, supported by supply issues in Libya, escalating tensions in the Middle East, and encouraging remarks from the Federal Reserve's December meeting minutes.

Additionally, the U.S. Non-Farm Payrolls report could have a significant influence on the near-term direction of the market if it substantially alters the market’s expectations of a Fed rate cut in March.

Supply Factors

Middle East Tensions and Libya

Current events in the Middle East and Libya are crucial for the oil market. The halt in operations at Libya's Sharara oilfield, with a capacity of 300,000 barrels per day, due to local protests, alongside heightened tensions involving Iran and Yemen, presents serious supply concerns. These issues, particularly the shipping disruptions in the Red Sea, could lead to supply shortages, pushing prices upward.

OPEC+ Influence

OPEC and its allies' ongoing collaboration, despite recent changes like Angola's departure, signals a controlled approach to oil supply management. The decisions made in the upcoming OPEC+ meeting on February 1st will be critical for global oil supply and prices.

US Strategic Petroleum Reserve

The U.S. decision to refill the Strategic Petroleum Reserve (SPR) reflects a move to stabilize domestic supply. This could soften the impact of global supply disruptions, potentially smoothing out price fluctuations.

Demand Factors

Economic Data and Fed Policy

The downturn in Eurozone business activity and rising inflation in Germany suggest a cautious monetary policy by the European Central Bank. Moreover, the Federal Reserve's stance on inflation and interest rates will significantly influence oil demand. Stable or reduced interest rates could promote economic growth, potentially increasing oil demand. However, traders may want to take a look at Friday’s NFP report before making a decision. A stronger-than-expected report could push market expectations of a Fed rate hike from March to May. That means, we’ll be looking at higher rates for longer than currently expected.

Inventory Reports

The recent data from API and EIA showing a significant draw in U.S. crude stocks against a backdrop of rising gasoline and distillate stocks presents a complex picture of demand. This imbalance could lead to price adjustments in the near term.

Regional Demand Trends

Differences in regional demand, as indicated by the low diesel demand due to mild temperatures in the Northeast U.S., are also important. These variations could lead to localized price changes.

Geopolitical Risks

The ongoing geopolitical tensions in the Middle East, involving Iran, Lebanon, and the Red Sea, add a layer of unpredictability. These risks could disrupt supply chains and significantly affect global oil prices.

Market Analysts' Views

Goldman Sachs analysts predict Brent crude to vary between $70 and $90 a barrel in 2024, considering factors like OPEC+ supply decisions, the global economic climate, and strategic petroleum reserve activities. Geopolitical risks continue to pose a significant upside risk to this forecast.

Weekly Technical Analysis

Weekly February WTI Crude Oil

Trend Indicator Analysis

The main trend is down according to the weekly swing chart. The main trend turned down the week-ending November 10th when sellers took out the last main bottom at $76.43.

One potential downside target is the main bottom at $64.24. Taking out this level will reaffirm the downtrend. The trend will change to up on a move through $88.21. A trade through $91.14 will reaffirm the uptrend.

The minor trend is also down. A trade through $76.18 will change the minor trend to up. This will also shift momentum to the upside.

Retracement Level Analysis

The contract range is $38.63 to $91.14. Its retracement zone at $64.89 to $58.69 is the major support zone. This area stopped the selling the week-ending March 24 at $64.24 and the week-ending May 5 at $65.24. This is a major long-term value zone.

The intermediate range is $41.44 to $91.14. Its retracement zone at $66.29 to $60.43 is additional support. A second intermediate range is $58.90 to $91.14. Its retracement zone support is $70.75 to $65.94.

Combining the two intermediate 50% levels creates a third support zone at $70.75 to $66.29. This area held as support the week-ending December 15 at $67.98.

The minor range is $88.21 to $67.98. Its retracement zone at $78.10 to $88.21 is the next potential upside target area.

Closing Price Reversal Bottom Chart Pattern

Following the prolonged move down in terms of price and time, February WTI crude oil posted a closing price reversal bottom on the weekly chart during the week-ending December 15. This typically leads to a 2 to 3 week counter-trend rally. We saw that with the rally culminating at $76.18 during the week-ending December 29.

The market is now consolidating between $67.98 and $76.18 as traders assess the current fundamental situation before making their decision to either buy strength or sell weakness.

Weekly Technical Forecast

The direction of the February WTI crude oil market the week-ending January 12 is likely to be determined by trader reaction to the new minor 50% level at $72.18.

Bullish Scenario

A sustained move over $72.18 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 with $78.10 to $80.48 a potential upside target.

Bearish Scenario

A sustained move under $72.18 will indicate the presence of strong sellers. This could create the downside momentum needed to challenge the 50% level at $70.75, the main bottom at $70.75 and the support cluster at $66.29 to $64.89.

Short-term Weekly Forecast

The crude oil market's recent behavior reflects the interplay of supply concerns, demand shifts, and geopolitical risks. These elements have led to notable price volatility. Looking forward, the market's direction in the coming week will likely hinge on new developments in the Middle East, OPEC+ decisions, economic data, and inventory updates. Traders should monitor these aspects for indications of potential price movements.

Based on this week’s price action, it looks as if prices aren’t likely to spike higher unless there is a direct blow to crude oil supply in the Middle East.

From a technical perspective, we’re not expecting sellers to significantly challenge the major support area between $70.75 and $64.89. The big question is, what has to happen to encourage traders to chase the market higher by buying strength? Without a major bullish catalyst, the market seems content with holding prices in a range. Even during a consolidation phase, the market could be subject to heightened volatility, however. So be prepared for a volatile two-sided trade.