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Abstract: The cartel's hope of reducing oil supply offset the weak demand in China. Last month, China's consumer price index (CPI) continued to shrink (-0.3%) despite deflation, while the producer inflation rate was -4.4%, higher than the expected -4.1%.

Fundamentals

The CPI in China dropped by -0.3% in July, the first time since February 2021. Although this result is slightly better than the -0.4% decline expected by the market, it also highlights the resistance faced by the economy.

The core inflation index (excluding food and energy costs, which are often unstable) rose from only 0.4% to 0.8%. This shows that there is some potential demand within the economy, although the demand is not large.

Dong Lijuan, the chief statistician of the National Bureau of Statistics, said, "With the influence of high base gradually fading last year, CPI is expected to gradually pick up."

Affected by the fluctuation of international commodity prices and the overall weak market demand in China and the rest of the world, the PPI has further declined and is still full of challenges. China's PPI improved from -5.4% to -4.4% in July. This figure is lower than the market expectation of -3.8% and marks the tenth consecutive month of negative value.

Today's data from China seems to put pressure on oil prices, which is understandable as the world's second-largest economy. Despite this, the oil price is still not far from the previous high point. Since late June, WTI crude oil has rebounded by more than 20%. In addition to all the production reduction measures implemented by OPEC+ since the end of last year, the production reduction measures of Saudi Arabia and Russia are playing a role. At the same time, the weak demand in China was offset by the cartel's hope of joining in cutting crude oil supply. Now the market looks tighter, and the economic outlook may be brighter because the tightening cycle of central banks has come to an end.

In terms of oil price trend, from March to June, WTI crude oil formed a lot of support around US$70.00-$72.00, but since then, the price rebounded strongly, breaking through the downward channel and recently breaking through the 200- and 233-day SMAs.

In theory, this puts it back in the bullish range, and today it is testing the upper resistance of US$83.51, just like last week. Breaking below will be a bearish signal in the near future, while holding above may once again strengthen the bullish potential of last month's breakthrough.

One thing worth noting is that the momentum indicator has been weakening since mid-July, suggesting that the recent rebound could be recurring. This divergence is not a bearish signal per se, but it can be seen as a danger signal and a great test of stop loss settings.

In terms of data, the crude oil market will get more data from the crude oil inventory report released by the U.S. Department of Energy today. The market now expects that EIA crude oil inventory will increase slightly by 2.1 million barrels in the week of August 4, and it unexpectedly decreased by 17 million barrels in the previous week. However, the data in line with market expectations means that demand rebounded last week, which may push crude oil prices up further.

On the other hand, a large increase in inventory may indicate that supply is still high or demand is weak, thus making investors wary of the potential impact of rising borrowing costs on energy demand.

Technical Analysis

WTI Crude Oil has rebounded sharply after yesterday's sharp decline and has formed higher lows and higher highs; the price is currently trading within a new uptrend channel formed in the 1H timeframe. Price seems poised to break above the previous high of US$83.51 from here or test channel resistance around US$84.00.

WTI crude oil prices rebounded above the middle channel area of interest during the European session, reflecting the presence of bullish momentum. The 100 SMA also sits above the 200 SMA, suggesting that the path of least resistance is to the upside, or that rises are more likely to gain traction. Crude oil is also trading above both SMAs.

However, the stochastic indicator is showing overbought; therefore, moving lower means that selling pressure could return. Similarly, the Relative Strength Index is in the overbought zone, suggesting that the bulls are also starting to get exhausted.

Therefore, the top of the channel could still curb gains and allow crude oil prices to pull back to nearby support areas, such as the bottom of the channel at US$80.00. If the bears are not limited to this, then there is a possibility that the upper support line could be broken, allowing prices to fall back to US$78.00. It is recommended to go short at the highs.

Trading Recommendations

Trading direction: Short

Entry price: 81.70

Target price: 87.50

Stop loss: 78.20

Deadline: 2023-08-23 23:55:00

Support: 83.50, 83.38, 82.87

Resistance: 84.49, 86.80, 88.01