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Summary: Oil prices have surged to nearly a nine-month high due to concerns that the escalation of the Russia-Ukraine conflict could exacerbate an already tight market supply. Despite the U.S. government data indicating an increase of about 5 million barrels in crude inventories last week, oil prices continue to rise as investors focus on a significant decline in refined product inventories.

Fundamentals

Worries about the potential escalation of the Russia-Ukraine conflict have overshadowed the impact of the first increase in U.S. crude inventories in four weeks, keeping oil prices near the highest levels seen in months. While EIA data shows a nearly 6 million barrel increase in U.S. crude inventories last week, investors' main focus is on the substantial reduction in gasoline and distillate inventories, marking the largest declines in three months for both.

With low refined product inventories, concerns about demand are not the main theme for today. Technical factors are also supporting prices as they break above April highs. The latest supply threat comes from Russia's crude oil exports through the Black Sea facing risks, following Ukrainian President Zelenskyy's statement that Ukraine might retaliate if Russia blocks Ukrainian waters. Ukrainian drones attacked a Russian oil tanker over the past weekend. The tense situation between Russia and Ukraine has exacerbated concerns about tight supplies among OPEC+ member countries, with the unexpected increase in U.S. crude inventories having little impact on the market.

WTI crude oil weakened on Thursday, now trading around $83.40, having closed at a 9-month high the previous day. However, it has still risen about $1 this week, marking a continuous seventh week of gains, which would match the longest for the week of February 11, 2022.

Today's pullback in oil prices could simply be profit-taking as investors reposition before pushing commodities higher. From a technical perspective, oil prices could consolidate again before a possible retracement.

Meanwhile, oil prices appear to be supported by the prospect of additional stimulus measures in China, as pessimistic trade and inflation data might prompt the central bank and government to share details of their easing plans. This, in turn, could lead to robust economic growth, increasing demand for fuel and energy commodities, including crude oil.

Upcoming U.S. PPI data may also impact commodity prices, as strong inflationary pressures could drive the Fed to tighten policy, potentially dragging down risk assets.

Technical Analysis

WTI crude oil has established a foundation above $77.50. Since initiating a new leg of its uptrend, it has consistently breached key upside barriers, forming higher lows and higher highs within an ascending channel pattern visible in short-term charts. The price is currently pausing around the top of the channel at approximately $83.67, suggesting a potential correction.

The Fibonacci retracement tool indicates bearish anticipation. The 38.2% Fibonacci retracement aligns with the mid-channel region around $82.82, while the 50% Fibonacci retracement at $82.25 is in proximity to the 100 SMA dynamic support. A more substantial correction might extend to the 61.8% Fibonacci retracement at $81.68, near the 200 SMA or the bottom of the channel around $81 per barrel.

If either of these support levels manages to hold, crude oil could resume its climb toward recent volatility highs or the top of the channel. Since the 100 SMA is still positioned above the 200 SMA, the path of least resistance remains upward, implying that further gains are more likely to find traction than a reversal.

However, the stochastic oscillator is descending from overbought territory, indicating increasing bearish pressure. This could imply that an adjustment is likely, possibly until oversold conditions are met.

Similarly, the Relative Strength Index (RSI) has been in overbought territory for a considerable period and has ample room to descend before reflecting exhausted bearish sentiment. In terms of trading strategy, prioritizing going short at highs is recommended.

Trading Recommendations

Trading Direction: Short

Entry Price: 83.67

Target Price: 78.20

Stop Loss: 85.80

Valid Until: 2023-08-24 23:55:00

Support: 83.50, 83.38, 82.87

Resistance: 84.49, 86.80, 88.01