Chapter 9 07/31 WTI: Bullish Sentiment Remains, But Cautionary Measures Needed Against Bearish Attacks
Summary: Oil prices stabilized on Monday after climbing to a three-month high as China hinted at further measures to boost economic growth, and the global crude oil market continues to tighten. However, the upward momentum of oil prices may face constraints, leading to possible consolidation or a correction in the short term.
Fundamentals
With OPEC+ production cuts and record-breaking growth in oil demand, the oil market has been experiencing supply shortages. WTI crude oil has remained above $80 per barrel, rising for five consecutive weeks and reaching the highest level since April.
WTI crude oil has surged by 14% this month, on track for the largest monthly gain since January 2022, marking the best performance for July in nearly 20 years. The record-high demand and Saudi Arabia's supply cuts have led to supply shortages in the oil market. Meanwhile, the market has shrugged off its pessimism about economic growth. The continuous rise in oil prices has erased the losses seen since the beginning of the year.
The tightening fundamentals are driving oil prices higher, but concerns about demand still linger, with China being a key focus.
The Chinese economy had a sluggish start to the third quarter. The composite PMI dropped from 52.3 to 51.1 in July. The decline was due to a further slowdown in the services sector, which contracted more than expected (from 53.2 to 51.5). New orders decreased more than the previous month, and backlogs of work are rapidly declining, leading to job cuts in the industry.
However, there is a glimmer of hope from the manufacturing sector, as PMI unexpectedly rebounded slightly to 49.3 due to a smaller decline in demand and improved business activity expectations. This suggests that the hard-hit sector may be nearing its bottom, or even starting to recover from the bottom.
Despite mixed PMI data from China, traders hope that the government will implement tax cuts, interest rate reductions, and cost-cutting plans aimed at boosting the real estate sector and overall economic activity. This could translate into stronger trade activity and demand for commodities like crude oil and other energy products.
The market's renewed strength is also reflected in the key time spreads of crude oil prices. After briefly experiencing an inverse bearish futures contango structure last week, the premium spread between the two most recent WTI contracts stands at $0.35 per barrel, the highest level since November.
Last Friday, both WTI and Brent crude settled above their 200-day SMAs for the first time in nearly a year. If this trend continues, it could stimulate more buying interest, as it indicates a healthier technical backdrop.
Technical Analysis
WTI crude oil has been in a stable upward trend since late June, breaking above the 50-day and 200-day SMAs, as well as the descending trendline connecting lower highs since September 2022. In the past few trading days, oil prices have shown signs of consolidation near the three-month high of around $80.00 per barrel.
The current momentum indicators suggest that bullish forces are prevailing. Specifically, the Relative Strength Index (RSI) continues to remain above the 70-level, and the Moving Average Convergence Divergence (MACD) has strengthened above the 0-axis, reaching its highest level since April. At the same time, crude oil bulls continue to trend higher within a short-term upward channel and have found support around $80.90, but they are stalling within the middle region of the channel of interest. If the uptrend continues, the price might rise towards the channel's upper boundary around $82.61 per barrel, while a correction could prompt a test of the channel's support level.
The 100-day SMA being above the 200-day SMA indicates the path of least resistance is upwards, or the uptrend may resume.
However, the stochastic oscillator is declining, indicating selling pressure is at play, which could potentially drive the crude oil price down toward nearby support levels. A break below the channel's support of around $79.50 per barrel may signal a reversal of the uptrend.
Overall, after hitting a three-month high, the current upward momentum of WTI crude oil is not yet over. Nevertheless, as the price approaches the upper range of the consolidation pattern, the risk remains skewed to the downside, potentially setting the foundation for an upcoming correction. In terms of trading strategy, it is recommended to focus on going short at highs.
Trading Recommendations
Trading Direction: Short
Entry Price: 82.50
Target Price: 75.74
Stop Loss: 87.50
Valid Until: 2023-08-14 23:55:00
Support: 79.78, 78.34, 77.32
Resistance: 82.61, 83.35, 84.50
