Israeli conflict complexes oil fundamentals

Oil prices presented some wide fluctuations in the oil past week characteristic of the market’s sentiment for the international oil market. In this report, we aim to shed light on the factors driving WTI’s price over the past week, assess its future outlook and conclude with a technical analysis of WTI.

The bear’s hesitation

WTI’s prices had started to stabilise in the late American session on Friday, also for technical reasons as the downward movement of WTI’s price started to seem a bit overstretched. It should be noted that even the widely better-than-expected NFP figure that implied a relatively tight US employment market, failed to provide support for the USD and in that way to weigh on oil prices. Hence last week ended with some hesitation on behalf of oil bears to continue.

Monday’s positive gap

On Saturday early morning, the dramatic raid of Hamas over Israeli territory took place, which shook the world and tended to create substantial worries in the oil market as well. The fear of an escalation of the crisis at an international level, with other Arab countries taking part in the conflict understandably intensified market worries for further tightening of the supply side of the international oil market. As a consequence, on Monday’s opening, demand for oil surged substantially and pushed oil prices higher by more than $3 per barrel allowing for WTI prices to stabilise at around $84.50 per barrel for the next couple of days.  

Oil: Saudi Arabia’s pledge

Yet market worries for a possible further tightening of the supply side of the international oil market tended to ease on Wednesday, practically allowing oil prices to drop near yet just above Friday’s closing level. Analysts tend to highlight as the main factor behind the drop, Saudi Arabia’s pledge to help stabilise the oil market. Yet at this point, we should note that Russia seems also to be taking part in this effort yet with all the sanctions set on Russian oil, the effect may be limited. The main point of interest remains Saudi Arabia, given its proximity geographically and culturally to the Palestinians, but also its position as the main OPEC oil producer and its lowered production levels.

The slack in the US oil market

Yet the drop of oil prices on Wednesday may also have been maintained by the release of the API weekly US crude oil inventories. The report showed an increase of US oil inventories by 12.94 million barrels, while EIA is also expected to show an increase, yet far narrower. Should also EIA indicate an increase in US oil inventories that would imply that demand was not able to catch up with production levels, thus implying a slack in the US oil market that may weigh somewhat on WTI’s prices.

Thursday’s jump

During today’s European session, we note that both Brent and WTI prices rose simultaneously as OPEC stuck to its forecast for a robust oil demand at an international level, with consumption being at 2.44 million barrels per day (bpd) in 2023 and a bit lower at 2.25 bpd the coming year. Yet at this point, we note that OPEC’s forecasts tend to collide with EIA, which expects an easing of oil demand in the coming year due to worse conditions in China, India and Brazil. May we also note that the German government is now expecting the economy to shrink by 0.4% this year, implying a recession and the situation could be regarded as indicative of Europe and thus may weigh on oil demand.

The oil way ahead 

For the time being the situation in the international oil market tends to be quite fragile. Fundamentals that traditionally surround the oil market have become more complex with the conflict in Israel and the market is still having a wary eye over the situation there and how it could affect oil prices. We still consider that a possible escalation of the war in Israel especially if neighbouring Arab countries are to take part, directly or indirectly may have a bullish effect on oil prices, as market worries for the supply side of oil are expected to intensify. On the demand side we would highlight any signs of increased economic activity in China that may provide some support for oil prices, and vice versa. Also we would note that the possibility of a tight financial environment in various countries could have an adverse effect on economic activity and weigh on oil demand. 

Oil: Technical Analysis

WTI Cash H4 Chart

• Support: 81.60 (S1), 76.00 (S2), 72.30 (S3)
• Resistance: 84.50 (R1), 87.50 (R2), 92.15 (R3)

On a technical level, we note that WTI’s price action bounced on the 81.60 (S1) support line during today’s European session. Given that the downward trendline guiding the commodity’s price action was broken on Friday the 9^th of the month, the current inability of WTI’s price action to break the 81.60 (S1) support line and the RSI indicator which has risen and nearing the reading of 50, we tend to maintain a bias for the sideways motion to be maintain for the time being, yet the overall situation seems to be fragile.

Should the bulls be able to take advantage we may see WTI’s price breaking the 84.50 (R1) resistance line and aim if not breach the 87.50 (R2) resistance nest. Should the bears regain control over the pair, we may see WTI’s price breaking the 81.60 (S1) support base and we set as the next possible target for the bears, the 76.00 (S2) support level, a level that has not seen any price action since the 24^th of July, when it was last time broken.    

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