Oil Outlook: Oil bears hesitate

WTI’s price has moved lower since our last report yet there seems to be some hesitation among oil bears to push the commodity’s price even lower. In today’s report we are to discuss the state of the US oil market, the developments in Venezuela and the possibility of additional US sanctions on Russia. We are to conclude the report with a technical analysis of WTI’s daily chart.

US oil market seems to be tightening

Over the past week, we had signals for the US oil market implying a tightening. It started last Friday, with the Baker Hughes oil rig count increasing by one in a weak signal of increasing demand.

On Tuesday, the American Petroleum Institute reported a wide drawdown of US oil inventories of -9.3 million barrels, a drawdown certainly far wider than the expected -2.2 million barrels and not seen since June. The release highlighted that the US oil market is tightening as aggregated oil demand in the US was able to surpass oil production levels widely.

Yet yesterday, the Energy Information Administration’s report (EIA) tended to ease market worries as it also reported a drawdown, yet a far narrower one of -1.274 million barrels, which was narrower than the expected -2.4 million barrels, yet still implied that the US oil market is still tightening albeit at a possibly slower pace.

Should we see further signals of decisive tightening of the US oil market we may see oil prices getting some support, while should US oil inventories start rising again we may see oil prices being under pressure. 

Additional US sanctions on Russian oil could push oil prices higher

Yesterday, Bloomberg reported that should Russia reject a possible US peace plan for the war in Ukraine, the White House would prepare additional sanctions on Russian oil. According to the report the US may target Russian vessels and traders facilitating the Russian oil trade.

The market’s worries about the issue were amplified by the seizure of Venezuelan oil tankers early this week. We do not consider the possibility of the US seizing Russian vessels as probable, actually we consider it as remote, given the possible angry reaction from Moscow, yet the possibility of a new round of US sanctions on Russian oil, could provide some support for oil prices.

Please note that the market has allready largely priced in the already imposed US sanctions, while also note that US sanctions on Russian oil have effectively lowered its price, which may have also been reflected on the lowering level of oil prices in the international oil markets. Hence, the possibility of US sanctions on Russian oil may emerge, yet the support for oil prices may prove to be temporary or moderated. 

Further escalation in Venezuela could also support oil prices

After the seizure of a Venezuelan oil tanker, discussed in last week’s report, tensions escalated further as US President Trump ordered a blockade of all sanctioned oil tankers from entering or leaving Venezuelan ports. The US move is targeting the heart of Venezuelan government’s financing, adding more pressure on Venezuelan President Maduro to resign.

For the time being, reports highlight that as a response, besides characterising the US seizure of the ship as piracy, the Venezuelan government in defiance of the US government’s blockade, has ordered its navy to escort oil tankers in and out of Venezuela. It should be noted that the actions of the US Government have met scepticism within the US, by political opponents of US President Trump.

It should be noted that the Venezuelan PDVSA has yesterday resumed loading crude and fuel cargoes, after a suspension of operations due to a cyberattack last Sunday.

Estimates talk of Venezuelan exports of 900k barrels of oil per day and the threat of a deeper reduction of Venezuelan oil exports could have a bullish effect on oil prices. We note that the issue seems to be on a make-or-break point, as another possible seizure of a Venezuelan oil tanker or further escalation with US military operations on the ground of Venezuela could provide support for oil prices.

Oil Technical Analysis

WTI Cash Daily Chart

• Support: 51.40 (S1), 46.15 (S2), 42.00 (S3)
• Resistance: 56.00 (R1), 59.80 (R2), 62.40 (R3)

After  a drop since our last report WTI’s price seems to be teasing the 56.00 (R1) line. We tend to maintain a bearish outlook for the commodity’s price given that the downward trendline remains intact and the commodity’s price continues to form lower peaks and lower troughs. Also the RSI indicator despite correcting higher, remains below the reading of 50 implying a bearish inclination among market participants.

Also please note that WTI’s price action corrected higher yesterday after breaching below the lower Bollinger band, a rather expected reaction of the commodity’s price action. Please note that the 20, 100 and 200 moving averages, all point downwards supporting our current bearish outlook for WTI’s price. Despite further correction higher being possible, should the bears maintain control we may see WTI’s price action actively aiming if not breaching the 51.40 (S1) support line.

Yet a continuance of the drop of the commodity’s price would be entering levels not seen for the past four years, which may scare sellers. Should the bulls gain control over WTIs’ price, we may see it breaking the 56.00 (R1) resistance line and continue to move higher breaking the 59.80 (R2) resistance level, thus paving the way for the 62.40 (R3) resistance barrier. A stabilisation of the commodity’s price is also possible between the 56.00 (R1) line and the 59.80 (R2) level.      

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