Oil Outlook: WTI’s tumbling intensifies

Oil prices retreated since our last report substantially, given the intensification of the market’s worries for an easing of demand side of the international oil market. In today’s report, we are to have a look at the data relating to the US oil market and continue to view the fundamentals surrounding the international oil market. To conclude the report we will also provide a technical analysis of WTI’s daily chart.

tightness of US oil market remains

The data characterising the current conditions of the US oil market seems to support the idea that the US oil market remains tight. On Friday, we note that the Baker Hughes oil rig count showed that active oil rigs were reduced by one, a sign of the failure of the demand side of the US oil market to widen.

Furthermore, we note that on Tuesday, API reported that US oil inventories were reduced by -3.9 million barrels, which was narrower than last week’s reduction of -4.4 million barrels, yet still supported the idea that the US oil market remained tight.

On Wednesday, we got EIA’s report about the US oil inventories, which also implied that the US oil market remained tight as it reported a drawdown of -3.714 million barrels, which is also narrower than last week’s reported drawdown of 4.87 million barrels. Practically all three data related to the US oil market and were released since our last report align to suggest that production levels in the US oil market were not able to catch up with the aggregated oil demand.

Hence, given the drop in oil prices despite the tightness of the US oil market, we should seek the fundamental issues behind the drop in oil prices elsewhere. Nevertheless, should we see that in the coming week the indicators continue to suggest that the US oil market remains tight, we may see the weakening of oil prices being clipped or even reversed.

China remains a source of concern.

One of the main concerns among oil traders seems to be the prospects of China’s oil demand. As per Refinitiv, oil imports and refinery runs from China in the current year have trended lower than in the past year on weaker fuel demand amid sluggish economic growth, government data shows.

At this point, we would like to note that the economic performance of China remains worrying. The growth rate of industrial output for June slowed down, as did the urban investment growth rate, the GDP rate, and the retail sales growth rate, implying weak demand in the Chinese economy. At the same time, we note that the PBoC proceeded to cut the interest rates for short-term lending by 20 basis points, as well as the one- and five-year lending interest rates by 10 basis points, in an effort to boost economic activity.

Overall, should we see further signs of difficulty for the Chinese economy to recover, we may see the market’s expectations for a deterioration of Chinese oil demand intensifying and thus exercising bearish pressures on oil prices.

Easing of economic activity in the manufacturing sector

Furthermore, we also note that the manufacturing sectors of Japan, Australia, France, Germany, and the US suffered a contraction of economic activity in July, according to the preliminary PMI figures released yesterday. Should we see further signs of easing economic activity in the industrial sectors of the aforementioned countries, we may see bearish tendencies being exercised on oil prices as market expectations for oil demand at international levels grow further.

Are Gaza negotiations advancing?

Also, we note that the negotiations on a possible deal for a ceasefire-for-hostages exchange in the Gaza conflict seem to be nearing their end. Existing gaps are to be discussed by US President Biden and Israeli Prime Minister Netanyahu. Any possible progress towards a possible lasting ceasefire could allow oil prices to weaken further as market worries for the supply side of the international oil market could ease.

On the flip side, should the negotiations fail to achieve a breakthrough and tensions start to escalate with the possible intensification of the bombing in Gaza or even the opening of a second front in the Israeli-Lebanon border, it could drive oil prices higher as worries for a tightening of the supply side of the oil market.

التحليل الفني

WTICash Daily Chart

Support: 72.40 (S1), 68.00 (S2), 64.50 (S3)

Resistance: 76.70 (R1), 80.25 (R2), 84.10 (R3)

WTI’s price has tumbled since our last week, breaking consecutively the 80.25 (R2) and the 76.70 (R1) support levels, both of which have now turned to resistance. The commodity’s price action intensified its downward inclination since our last report after a relative stabilization, which served mostly as a confirmation of the downward movement. We tend to maintain a bearish outlook given that the RSI indicator is nearing a reading of 30, highlighting the strong bearish sentiment for the commodity’s price among market participants.

On the other hand, we have to note that WTI’s price action is breaching the lower boundary of the Bollinger Bands, which may slow down the bears or even cause a correction higher. Yet we would treat any correction higher as just that, a mere correction, as long as the downward trendline remains intact.

Should the bears maintain control over black gold’s price, we may see WTI’s price aiming if not breaching the 72.40 (S1) support line. For a bullish outlook, we would require WTI’s price action to break the 76.70 (R1) resistance line, continue higher to break the prementioned downward trendline, and reach, if not breach, the 80.25 (R2) resistance level.

Disclaimer:
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