Chapter 38 06/22 WTI: No Significant Pullback Expected Before the Supply Zone Test Completed
Fundamentals
In recent days, the Middle East crude oil market has shown signs of strength. Heavy purchases by Chinese and Japanese refineries, along with busy trading activities in key pricing windows, have resulted in a doubling of spot differentials for certain grades last week, which is an unusually large change for the period.
However, WTI crude oil for delivery in August fell 1% to $71.62 per barrel during Thursday's session. Despite China taking a series of gradual measures to promote economic growth, concerns remain about the adequacy of these actions. Oil prices are in a stalemate.
Oil has dropped in the first half of this year as China's reemergence from its strict Covid Zero policies has failed to gain traction and global crude supplies, including from Russia, remain abundant. In response, the Organization of the Petroleum Exporting Countries (OPEC) and its allies announced supply cuts in an attempt to tighten the market.
On Wednesday evening, Fed Chairman Powell submitted his semi-annual report to the House of Representatives. While policymakers kept rates unchanged at last week's meeting, they expect further rate hikes in the second half of the year to help bring inflation, which remains elevated, back to target.
Last week, investors largely continued to steer clear of oil trading as oil prices remained subdued and concerns about the macroeconomic backdrop lingered.
Data from FactSet shows that speculative long positions in U.S. crude oil increased by 12 million contracts, but short positions increased by nearly 23 million contracts, indicating investors hold a net short position of 10 million contracts.
Positioning data shows that investors turned more bullish on crude oil in early April after OPEC+ announced a production cut of 2 million barrels per day. However, since then, investors have shifted in the opposite direction.
Crude oil may take its cue from the U.S. Department of Energy's upcoming inventory report, as an increase of 329,000 barrels is expected. Previously, there was an increase of 7.9 million barrels, indicating a possible recovery in demand for this reporting week.
The American Petroleum Institute (API) reported oil production at 1.246 million barrels during the same period, so the Energy Information Administration (EIA) report may also show an unexpected decline, triggering another rebound in commodities.
However, the safe-haven sentiment generated by the risk of a recession from rising interest rates may restrain excessive oil price increases.
Technical Analysis
The recent upward movement of WTI crude oil appears to have broken out of its descending triangle pattern, suggesting there may be more upside potential. In the short term, crude oil prices could rise to test the unfinished supply zone near $70.50, with a target of $73.82.
The triangle range is approximately $67.00 to $76.00, so the resulting rebound could last about $9. The price is now close to the previous stop loss level of $70.50, and the next step could be to rise to our target of $73.82 to complete the range test.
However, technical indicators still indicate bearish sentiment. 100 SMA below 200 SMA indicates that the path of least resistance is to the downside or that resistance is more likely to hold than diverge. In this case, crude oil may fall back to the bottom of the triangle again.
At the same time, the oil price is also above the 10- and 20-day SMAs, so these moving averages may provide dynamic support near the top of the former triangle.
The stochastic oscillator is in the overbought zone, reflecting exhaustion in the bullish momentum, thus, a decline would confirm intensifying selling pressure. The RSI has more room to climb before reflecting overbought conditions, which also means that the bullish momentum may continue for some time. Buying the dips is recommended as the main strategy.
Trading Recommendations
Trading Direction: Long
Entry Price: 68.00
Target Price: 73.82
Stop Loss: 65.00
Valid Until: 2023-07-06 23:55:00
Support: 70.31, 69.60, 67.97
Resistance: 72.16, 72.53, 73.82
