Traders Cautiously Optimistic About Crude

Weekly Performance and Overview

As the week concludes, West Texas Intermediate (WTI) crude oil is experiencing a modest gain, increasing by approximately 1.35%. This movement reflects the interplay of global economic data, currency fluctuations, and geopolitical developments.

US Economic Data and Dollar’s Influence

A significant factor in this week's oil price movement has been the U.S. economic data, particularly the January retail sales figures, which showed a 0.8% decrease. This decline was more substantial than expected, resulting in a 0.3% drop in the U.S. dollar index.

The relationship between the dollar and oil prices is critical; a weaker dollar typically renders oil more affordable for buyers using other currencies, potentially boosting demand. Additionally, these retail figures have renewed expectations for interest rate cuts by the Federal Reserve, which could stimulate economic growth and, in turn, oil demand.

The anticipation of more accommodating monetary policy in response to the retail data, alongside the higher-than-expected inflation figures earlier in the week, has created a complex environment for traders to analyze.

International Energy Administration (IEA) Report Influence

The IEA's latest report also significantly influenced market sentiment. The agency reduced its 2024 oil demand growth forecast to 1.22 million barrels per day from 1.24 million, citing a slowdown in Chinese consumption and a challenging global economic situation. This downward revision, contrasting with OPEC's more optimistic demand growth forecast of 2.25 million barrels per day, introduces substantial uncertainty into the market. The divergent views of these major energy organizations underscore the complexities of predicting in an evolving global energy sector.

Energy Information Administration (EIA) Report Implications

Despite bullish trends, the market had to counter a bearish report from the EIA. The report indicated a significant increase in U.S. crude inventories, rising unexpectedly by 12.0 million barrels, much higher than the 2.6 million barrels anticipated. This increase in inventories could be attributed to a decrease in refining activities, reaching their lowest level since December 2022 due to both planned and unplanned outages. The discrepancy between expected and actual inventory levels posed a challenge for traders, as higher inventory levels typically signal potential oversupply, exerting downward pressure on prices.

Recession Concerns and Their Impact

Global recession worries also influenced oil markets. Notably, the UK and Japan officially entered recessions, signaling potential reductions in oil demand from these significant economies. The UK's GDP contracted by 0.3% in the fourth quarter of 2023, marking a second consecutive quarter of contraction, while Japan's economy also declined. These developments contribute to a cautious outlook for global oil demand, as economic downturns typically lead to reduced energy consumption.

Weekly Technical Analysis

Weekly April WTI Crude Oil

Trend Indicator Analysis

The main trend is down according to the weekly swing chart, but the minor trend is up. This divergence is helping to create the two-sided price action. We essentially have the short-term traders reacting to a volatile news situation, while the longer-term traders are capping gains by selling rallies based on their interpretation of the fundamentals.

A trade through $79.09 will change the main trend to up. A move through $68.57 will signal a resumption of the downtrend.

Retracement Level Analysis

The contract range is $38.90 to $89.19. Its retracement zone at $64.05 to $58.11 is the major support zone. This area stopped the selling the week-ending March 27, 2023 at $65.00 and the week-ending June 16, 2023 at $65.41. This is a major long-term value zone.

The intermediate range is $58.85 to $89.19. Its retracement zone at $77.10 to $79.95 is resistance.

The minor range is $65.00 to $85.75. Its retracement zone is $75.38 to $72.93.

The market has been straddling both the intermediate and minor retracement zones for nearly a year.  

Weekly Technical Forecast

The direction of the April WTI crude oil market the week-ending February 23 is likely to be determined by trader reaction to the intermediate 50% level at $77.10.

Bullish Scenario

A sustained move over $77.10 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 into the main top at $79.09. Taking out this level will change the main trend to up with $79.95 the next target. This 61.8% level appears to be the trigger price for an acceleration to the upside.

Bearish Scenario

A sustained move under $77.10 will indicate the presence of sellers. This could drive the market into the minor retracement zone at $75.38 to $72.93.

Short-Term Forecast

In evaluating the diverse factors at play, the forecast for WTI crude oil in the upcoming week remains cautiously optimistic but intricate. The dollar's recent weakening, alongside potential rate cuts by the Federal Reserve, may bolster oil prices by stimulating demand. However, this positive sentiment is countered by the IEA's updated demand forecast, an unexpected increase in U.S. crude inventories, and persistent concerns about global economic downturns.

The geopolitical scenario in the Middle East adds another layer of complexity. Despite the lack of major headlines this week regarding conflicts in Gaza and the Red Sea, their potential for causing supply disruptions remains a critical consideration. Even subtle indications of supply instability in these regions could swiftly trigger a significant rise in oil prices.

In the forthcoming week, traders should focus on new developments in U.S. economic data, particularly any signs of policy changes from the Federal Reserve. Such shifts could greatly impact the dollar's value and consequently affect oil prices. Equally important are updates from the IEA or OPEC concerning global oil demand forecasts, as well as geopolitical events in key oil-producing regions. The combined effect of these factors will likely be instrumental in shaping the direction of WTI crude oil prices in the short term.

Technically speaking, the market is in a position to change the main trend to up on the weekly chart, but we’ve been there before so brace yourself for another round of rangebound trading if $79.95 holds as  resistance. The price action would create a balance zone or “sweet spot” for traders between $77.10 and $75.38, which could mean more choppy, two-sided trading.