Selling Pressure in Oil Subsides

Weekly Overview

This week in the crude oil market, Thursday's session concluded with the U.S. benchmark February West Texas Intermediate (WTI) crude oil futures settling lower. Despite this downturn, the market managed to retain most of its gains for the week. The early part of the week was characterized by bullish trends, driven by several factors including Middle East tensions affecting supply routes and a weakening U.S. Dollar, which made dollar-denominated crude oil more attractive to foreign buyers.

Middle East Tensions Elevate Market Uncertainty

Escalating tensions in the Middle East notably influenced the crude oil market this week. The strategic Red Sea shipping lanes encountered increased risks following attacks by Yemen's Iran-aligned Houthi militants. These incidents spurred a rise in oil prices, as traders braced for anticipated disruptions in maritime trade. Responding to these challenges, the U.S. government announced the formation of a task force to safeguard Red Sea commerce, underscoring efforts to protect this vital trade corridor. While these attacks have certainly raised the risk premium in the market, some analysts contend that, as of now, the actual impact on oil supply remains limited.

EIA's Insightful Data: Bearish Implications

Data from the U.S. Energy Information Administration (EIA) revealed an unexpected increase in U.S. crude, gasoline, and distillate stocks last week, surpassing analysts' expectations. This significant rise in inventory levels suggests a shift towards a bearish scenario in the oil market. The higher-than-anticipated stockpile indicates a potential oversupply, which could exert downward pressure on oil prices. This data, reflecting a discrepancy between supply and demand, is likely to be a key factor for traders and market analysts in assessing future price movements.

Strategic Reserve Actions

In a significant move, the U.S. Energy Department announced the purchase of 2.1 million barrels of crude oil for the Strategic Petroleum Reserve (SPR), slated for delivery in February. This acquisition, aimed at replenishing the reserve, highlights a strategic approach to managing national energy resources and could have implications for market supply.

Angola's Departure from OPEC

The announcement of Angola's exit from OPEC marked a notable event in the week. While Angola's production capacity is relatively modest compared to the total output of OPEC, its decision to leave the organization raised questions about OPEC's future and its role in global oil markets. This development is generally viewed as a bearish signal, potentially impacting OPEC's ability to influence oil prices.

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.

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.

Although the formation and subsequent confirmation of this chart pattern this week can produce enough upside momentum to fuel a 2 to 3 week rally, it should not be considered a change in trend.

Sometimes, it is just a relief rally that alleviates some of the downside pressure. Other times, it’s a short-covering rally that is used to set up the next selling opportunity. Nonetheless, it should be monitored carefully especially if you are short. The chart pattern has the potential to drive February WTI crude oil back to $78.10 to $80.48.

If $67.98 is taken out then the chart pattern failed, setting up the market for further downside action. The reversal pattern may repeat several times until a final bottom is reached because the market is testing a major support area and value zone. This makes it attractive to aggressive counter-trend buyers.

Weekly Technical Forecast

The direction of the February WTI crude oil market the week-ending December 29 is likely to be determined by trader reaction to the 50% level at $70.75.

Bullish Scenario

A sustained move over $70.75 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 $70.75 will indicate the presence of strong sellers. This could create the downside momentum needed to challenge a support cluster at $66.29 to $64.89. This is followed by longer-term support at $64.89 to $58.69.

Short-term Weekly Forecast

In the short term, the crude oil market's direction seems poised to be influenced by a combination of recent developments. The week's initial bullish trend was spurred by escalating Middle East tensions and a depreciating U.S. Dollar, lending an upward impetus to prices. However, this ascent is tempered by the rise in U.S. crude inventories, indicating possible oversupply that could pressure prices downwards.

Offsetting this bearish signal, the U.S. government's decision to purchase oil for its strategic reserve may help by withdrawing some of this surplus from the market. Additionally, Angola's departure from OPEC introduces a measure of unpredictability into the global oil landscape.

Traders should brace for ongoing fluctuations and increased volatility, shaped by these geopolitical factors, fluctuating inventory levels, and policy decisions.

From a technical standpoint, the weekly chart presents a more optimistic scenario. It suggests that the major selling pressure might be subsiding, with the market showing signs of consolidation. The presence of a weekly closing price reversal bottom indicates a leaning towards upward movement in the coming weeks. Although a significant breakout rally isn't anticipated, there appears to be sufficient momentum for February WTI crude oil to potentially reach $78.10 in the next few weeks.

The market also finds robust long-term support in the $64.89 to $68.59 range, providing a strong buffer against any major downturns.