What Will It Take For Oil Prices To Stop Falling?

Crude Oil Market Overview

The current state of the crude oil market is marked by a downward trend, with both the international benchmark Brent crude and the U.S. benchmark WTI crude oil on track for a significant weekly decline. This downturn is driven by concerns over demand and a diminishing war-risk premium, intensified by recent geopolitical events.

Economic Influences and Market Reactions

Compounding the market's woes, recent comments by U.S. Federal Reserve Chairman Jerome Powell about potential future interest rate hikes have unsettled expectations for strong demand in both stock and crude oil markets. The global economic slowdown, marked by October's peak in 10-year U.S. Treasury note yields and deteriorating business conditions in key economies, is exerting additional downward pressure on oil prices. Despite growth in the U.S. economy, concerns persist over crude oil demand growth.

China's Economic Data and Inventory Surges

In China, difficulties in managing disinflation and a contraction in exports have cast doubt on the prospects for a robust economic recovery, crucial given China's status as a leading commodity consumer. Meanwhile, U.S. crude oil inventories reportedly saw a substantial increase of 11.9 million barrels in the week leading up to November 3, marking a significant stockpile growth.

Market Performance and Outlook

December WTI crude oil is displaying its weakest performance since the late June OPEC? decision to reduce crude production. Brent futures have experienced a notable price drop, and the six-month spread indicates a shift from previous market conditions. In the U.S., crude and condensate outputs have surpassed pre-pandemic levels, defying expectations of a downturn in production.

Supply Dynamics and Price Trends

The depletion of crude oil stocks, especially at Cushing, Oklahoma, has been a key factor affecting market dynamics. This depletion led to a sharp backwardation in the WTI futures contract by September's end, resulting in a reduction of bearish short positions by hedge funds and other money managers, further influencing the rise in prices.

Strategic Petroleum Reserve and Market Forecast

In a move to stabilize reserves, the U.S. Department of Energy announced plans to buy up to three million barrels of oil for January 2024 delivery, complementing an earlier plan to purchase 6 million barrels for December and January. This initiative is part of ongoing efforts to bolster the country's strategic petroleum reserves.

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis             

The main trend is down according to the weekly swing chart. The main trend turned down this week when sellers took out the last main bottom at $77.03. The trend will change to up on a move through $92.48. A trade through $93.92 will reaffirm the uptrend.

Retracement Level Analysis

The contract range is $37.89 to $93.92. Its retracement zone at $65.91 to $59.29 is the major support zone. This stopped the selling the week-ending May 5 at $63.00.

The intermediate range is $63.00 to $92.48. The market is currently testing its retracement zone at $77.74 to $74.26.

The minor range is $92.48 to $74.91. Its retracement zone at $83.70 to $85.77 is a potential upside target and resistance zone.  

Weekly Technical Forecast

The direction of the December WTI crude oil market the week-ending November 17 is likely to be determined by trader reaction to the retracement zone at $77.74 to $74.26.

Bullish Scenario

A sustained move over $77.74 will signal the presence of strong counter-trend buyers. If this creates enough near-term momentum then look for a retest of the minor retracement zone at $83.70 to $85.77. Since the main trend is down, sellers are likely to come in on a test of this area.

Bearish Scenario

A sustained move under $74.26 will indicate the presence of strong sellers. This could trigger a further decline with the nearest target the main support zone at $65.91 to $59.29. This is a long-term value area so buyers are likely to re-emerge following a test of this area.

Short-Term Weekly Forecast

Looking ahead, the market appears to be adjusting to a more neutral state after previously bullish sentiment in September.

Prices for Brent and WTI are now closely aligned with long-term averages, and six-month spreads suggest a market that is neither distinctly bullish nor bearish.

The upcoming week is expected to see continued moderation in oil prices, influenced by global economic factors and market adjustments to recent geopolitical developments. The focus will be on OPEC's upcoming meeting and the release of oil inventory data, which could provide further insights into the future direction of the market.

The weekly technical analysis closely aligns with the weekly fundamental analysis in that both are signaling a possible neutral trade. Technically, the balance area for the May to September rally of $63.00 to $92.48 is $77.74 to $74.26.

Technical traders are likely to use this zone to gauge sentiment in the market i.e. bullish over $77.74 and bearish under $74.26.

But don’t get too excited about shorting weakness under $74.26 since the market is nearing a value zone. Shorting weakness is a risky proposition at current price levels.

The traders in the money at this time are the aggressive ones that sold when everyone seemed to want crude oil. On the flip side, with the market taking a hit since September, deciding to start a short-sale campaign now might land you in a bear trap.

With the main trend down, wait for a rebound rally before initiating new shorts.