Chapter 2 04/17 WTI: Gap Between Indicators Narrowing, Signaling Bears Eager to Return
Summary: Warnings from the International Energy Agency (IEA) about future price increases were offset by a rising USD and a headwind in demand. Oil prices stalled after a fourth consecutive week of gains.
Fundamentals
WTI crude oil fell below $82 a barrel Monday after posting its longest one-week gain since June. A return of risk appetite pushed the U.S. dollar higher as stocks from Hong Kong to London rose. Continued concerns about global inflation and demand for crude-based products weakened the outlook for higher prices.
The International Energy Agency (IEA) warned on Friday that the unexpected production cuts announced by OPEC+ earlier this month will cause consumers pain in response to price increases. The agency said supply constraints from May should further tighten the outlook for the second half of the year.
Crude oil prices have now rebounded from the banking crisis that hit the entire market in March. Clearly, concerns about stagnant economic growth and unchecked inflation are limiting the market's efforts to push prices higher. A break above the $85 mark for WTI crude oil will be a difficult task in the near future.
At the same time, a reduction in crude oil stocks at the working storage capacity in Cushing and supply disruptions in Iraqi Kurdistan have exacerbated the tightness in the global market.
Two weeks ago, OPEC+'s decision to cut production in May apparently pushed prices higher. However, falling refinery margins are a concern, indicating weak demand, especially for middle distillates.
Some Asian refineries are considering cutting back on crude product processing due to declining margins, while signs of weakness in the diesel market could fuel slowdown concerns. This could limit further gains in oil prices.
Crude oil prices will move in the coming days depending on which way the wind blows when the U.S. first-quarter reporting season is in full swing. Investors will also be watching for the performance of China's first-quarter GDP data and continued bets on Fed policy as the Fed's next meeting approaches.
Overall, investors are currently weighing mixed signals regarding the outlook for crude oil prices, with no clear direction for oil price action for the time being. While price and term spreads have consolidated on the back of expectations of a tightening market, concerns about demand clearly remain. On the demand side, refinery margins are low, but the IEA and others expect strong Chinese demand and recent Saudi-led production cuts to tighten the market.
Technical Analysis
After two weeks of consolidation, WTI crude oil prices remain strongly supported as prices broke out of a week-long consolidation pattern last week following the OPEC+ decision to announce production cuts the week before.
WTI crude oil prices are currently in correction mode and seem to be finding suitable buyers at Fibonacci retracement levels, especially the 38.2% Fibonacci level around $82.00. If prices get strong buying here, it could be enough to push crude oil up to $83.52-$84.70 per barrel or higher.
A larger correction could take prices down to the 50% Fibonacci level near $81.46 or close to the $81.00 handle and 200 SMA dynamic support (61.8% Fibonacci level).
As for the moving averages, the 100 SMA is above the 200 SMA, indicating that the path of least resistance is to the upside, or that support is more likely to hold than to be broken down. However, the gap between the indicators is narrowing, indicating weakening upward pressure.
The RSI is moving sideways to reflect price consolidation and is providing few strong directional cues at this point. The Stochastic Oscillator also appears to be moving lower but not touching overbought territory, suggesting that bears are eager to return to fill the gap from two weeks ago. If that happens, crude oil prices will return to the $75.00 range. It is recommended to go short at highs.
Trading Recommendations
Trading Direction: Short
Entry Price: 82.00
Target Price: 75.00
Stop Loss: 87.00
Valid Until: 2023-05-01 23:55:00
Support: 78.98, 77.52, 77.06, 76.11
Resistance: 80.59, 80.99, 82.64, 84.44
