The Wildcard For Oil Markets Next Week

U.S. West Texas Intermediate crude oil futures are up late in the session on Thursday but off its intraday high. Prices have been supported throughout the session by a weaker U.S. Dollar, tight U.S. supply and hopes for improved fuel demand in China after COVID-19 curbs were eased in two major cities.

The prospect of a lower price cap on Russian oil is also lending support, analysts said. European Union governments tentatively agreed on Thursday on a $60 cap on Russian sea-borne oil, an EU diplomat said.

The wildcard is OPEC+, which holds a virtual meeting on Dec. 4 to discuss policy.

Technically, January WTI crude oil futures are in a position to post a potentially bullish closing price reversal bottom. This won’t change the trend to up, but if confirmed next week, it could trigger the start of a 2 to 3 week counter-trend rally.

US Dollar Hits Four-Month Low

The U.S. Dollar dipped to 16-week lows against a basket of major currencies on Thursday after data showed that U.S. consumer spending increased solidly in October, while inflation moderated, adding to expectations that the Federal Reserve is closer to reaching a peak in interest rates.

A weaker greenback tends to increase foreign demand for dollar-denominated crude oil.

China Eases Zero-COVID Strategy

Optimism over Chinese oil demand recovery was lifted on Wednesday when the cities of Guangzhou and Chongqing announced the easing of COVID curbs. This took place a day after demonstrators in southern Guangzhou clashed with police amid a string of protests against the world’s toughest coronavirus restrictions.

US Crude Stockpiles Plunge as Output Climbs to Highest Since March 2020

Crude inventories fell by 12.6 million barrels in the week to Nov. 25 to 419.1 million barrels, the Energy Information Administration said on Wednesday, compared with expectations in a Reuters poll for a 2.8 million-barrel drop.

The drop was attributed to refiners who continued to boost activity to counter low U.S. inventories headed into the winter heating season.

EU Tentatively Agrees to $60 Price Cap on Russian Seaborne Oil

European Union (EU) governments tentatively agreed on Thursday on a $60 a barrel price cap on Russian seaborne oil – an idea of the Group of Seven (G7) nations – with an adjustment mechanism to keep the cap at 5% below the market price, according to diplomats and a document seen by Reuters.

The agreement still needs to be approved by all EU governments in a written procedure by Friday. Poland, which had pushed for the cap to be as low as possible, had as of Thursday not confirmed if it would support the deal, an EU diplomat said.

This is a potentially bullish development since it could lead to lower world supply.

OPEC+ to Meet Virtually

OPEC+ is scheduled to meet virtually on Dec. 4. Earlier in the week, there were rumors that the group was considering cutting output due to expectations of lower demand and the lack of clarity over the impact of the looming Russian oil-price cap on the market.

However, traders now feel that since the meeting is being held virtually, there is very little chance of a major policy change. If they do make a surprise cut then look for a volatile spike to the upside.

Weekly Technical Analysis

Weekly January WTI Crude Oil

Trend Indicator Analysis        

The main trend is down according to the weekly swing chart. A move through $92.53 will change the main trend to up. A trade through $73.50 will signal the resumption of the downtrend.

The minor trend is also down as well as momentum.

Retracement Level Analysis

The short-term range is $108.63 to $73.50. Its retracement zone at $91.07 to $95.21 is resistance. It stopped the rally two weeks ago at $92.53.

The main range is $60.23 to $108.63. The market is currently testing its retracement zone at $84.43 to $78.72. This is a potential support area.

The contract range is $35.98 to $108.63. Its retracement zone at $72.31 to $63.73 is the next major downside target and value zone. This week’s low at $73.50 stopped a little above this area.

Weekly Technical Forecast

The direction of the January WTI crude oil market the week-ending December 9 is likely to be determined by trader reaction to $76.28.

Bullish Scenario

A sustained move over $76.28 will signal the presence of buyers.  This could fuel a rally into $84.43. Overtaking this level could lead to a retest of the retracement zone at $91.80 to 97.77. The latter is a potential trigger point for an acceleration to the upside.  

Bearish Scenario

A sustained move under $76.28 will indicate the selling pressure is getting stronger. This could trigger an acceleration into the major 50% level at $72.31. This is a potential trigger point for an acceleration into $63.73.

Short-Term Outlook

Technical factors have moved to the forefront this week with the January WTI crude oil futures contract in a position to post a dramatic and potentially weekly closing price reversal bottom. A close over $76.28 will form this chart pattern.

We’re not likely to see a change in trend over the near-term, but if this chart pattern is confirmed next week, we could see the start of a 2 to 3 week counter trend rally.

If the chart pattern fails then look for the selling to possibly extend into $72.31 to $63.73. This is a value zone so we expect to see buyers come in on a dip into this area.

Traders seem to be waiting for a catalyst. The next catalyst could be more easing of COVID curbs by China, a surprise output cut from OPEC+ or clarity over the impact of the cap on Russian oil. A steep drop by the U.S. Dollar could also be considered a bullish catalyst.

The bullish factors seem to be adding up but buyers appear to be reluctant to take an aggressive position in front of the OPEC+ decision on December 4.