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Summary: Oil prices posted a weekly rise for the first time in over a month, buoyed by market optimism that the U.S. would reach an agreement to raise the debt ceiling and avoid a catastrophic default.

Fundamentals

WTI crude oil closed on Friday at $71.86 per barrel, down 0.4% intraday but still marking its first one-week gain in five weeks, edging up 3%.

Nevertheless, crude oil prices are still down 10% this year as China's sluggish economic recovery and the Fed's tightening monetary policy weigh on the outlook. Last week's gains are not seen as a significant change in market sentiment and could just be a bounce off the bottom.

Over the past week, the oil market continued to take cues from risk sentiment. Late in the week, after some signs of progress on the debt ceiling, officials indicated that negotiations had regressed over the weekend. Meanwhile, Fed officials injected some uncertainty into the market as they became increasingly divided on whether to raise or pause interest rates at next month's meeting.

The lack of any agreement could create more uncertainty in the market, which could derail the rally in risk assets. On the other hand, strong growth in risk-taking may be enough to sustain crude oil's rally.

U.S. commercial crude inventories rose sharply last week for the second consecutive week on weak U.S. manufacturing demand. Data from the Institute for Supply Management (ISM) showed that the U.S. manufacturing sector has contracted for six consecutive months. Some market watchers wonder if OPEC will consider cutting production again.

Upcoming inventory reports from the API and EIA could also influence crude oil price action around the middle of the week. Another unexpected increase in inventories could mean another drop in crude oil prices, as it suggests that demand is slowing significantly.

Technical Analysis

WTI crude oil is rising within an upward channel in its hourly time frame, with prices currently testing support around $72.00.

If this level continues to hold as the floor, crude oil prices could resume their rally to the next upside target, which is the channel top at $74.00.

In the 1-hour time frame, the 100 SMA seems to still be trying to form a bullish crossover above the 200 SMA, to confirm that support is more likely to hold rather than break. However, the current oil price is still below these two moving averages, so they could act as dynamic resistances in the short term.

Meanwhile, the Stochastic Oscillator has been on the rise after recently reflecting oversold conditions, implying that the bulls are returning. The RSI is also on an upward trend, so prices could follow suit as long as bullish momentum is present. Lastly, both oscillators have plenty of room to cover before reaching overbought territory, reflecting exhaustion among the bulls.

In terms of trading strategy, it's recommended to buy the dips during the consolidation in the triangle pattern.

Trading Recommendations

Trading Direction: Long

Entry Price: 71.30

Target Price: 75.80

Stop Loss: 69.30

Valid Until: 2022-06-05 23:55:00

Support: 70.89, 70.04, 69.35

Resistance: 72.19, 73.50, 75.06