Oil prices fall as demand eases

WTI retreated to the $85 per barrel this week as US crude oil inventory data showcased a larger than expected buildup of reserves. Oil traders continue to grapple with conflicting fundamentals of OPEC+ supply cuts, European Union’s embargo on Russian oil and the deteriorating demand outlook from China, which continues to enforce its draconian zero covid policy plans. Moreover, growing fears for a potential global economic recession supported by the aggressive monetary policy tightening practices of various central banks, inject additional uncertainty in the equation. In this report we aim to shed light on the catalysts driving WTI’s price, assess its future outlook and conclude with a technical analysis.

Inflation print grabs market’s attention

Today the markets anticipate the crucial US CPI print for the month of October which will provide valuable clues as to where the inflationary problem stands in the US economy. The year-on-year headline rate is expected to slow down to 8.0% from the prior month’s 8.2% and if actually so, may enhance market expectations that inflation has peaked and is slowing down, which in turn may incentivize the Fed to decelerate its aggressive rate hiking path. On the flip side however, we must note that the month-on-month rate is expected to accelerate to 0.6% compared to September’s 0.4% and if actually so, may be implying that inflationary pressures are still simmering under the surface. Such a scenario in conjunction with the fact that, even though the headline rate may slow down to 8.0%, is still a far cry from the Fed’s target of 2.0%, therefore it may not allow the central bank to ease its hawkish stance. Last week the Fed raised its Federal Funds Rate to 4% as the central bank hiked by 75 basis points for the fourth consecutive meeting in an attempt to curb rogue inflationary pressures in the US economy. Also, a positive employment report with the exception of the uptick of the unemployment rate practically reassured the view that there is still room for further hikes. As a result, the prospect of even higher interest rates weighs on the demand outlook of oil, as the effect of the Fed’s aggressive monetary policy practices contributes to the slowdown of economic activity in the US economy and increases the odds for global economic recession.

Crude oil inventories report larger than expected buildup

On another note, the US crude oil inventories pointed to a decrease in oil demand during the past week, as the EIA yesterday reported a larger than expected rise of 3.9 million barrels in US inventories, despite expectations for a built up of only 1.360 million barrels. Furthermore, the API weekly crude oil inventories figure reported on Tuesday, also pointed to an oversized buildup, exceeding estimates by 5.6 million barrels for the same period. The expectation was for 1.1 million barrels. The buildup of inventories in both readings explains the recent slump in oil prices observed during this week. Moreover, we would note that last Friday the Baker Hughes oil rig count showed that the number of active oil rigs in the US has risen by 3 reaching a total of 613, which could be an indication of increased demand levels. On another note, the EIA latest short term energy outlook report states that uncertainty in macroeconomic conditions could have a significant effect on energy markets going in 2023 as the S&P Global macroeconomic model forecasts US GDP to ease slightly next year contributing to a drop in crude oil consumption.

India swoops in to buy Russian oil

As the finance ministers of the G7 group are set to finalize their price cap plans of Russian crude on December 5^th, Russia is reportedly seeking to divert its flows from the European continent embarking on journey east, having in sight countries such as India, Turkey and China. The embargo in a sense seeks to restrict excessive revenues from the sale of Russian crude flowing back to Moscow, which are being used to fund the prolonged war in Ukraine. Analysts expect that Russia won’t likely be interested in participating in a deal under such terms and could in turn workaround the embargo. Recent reports surfaced, show that India is to become one of Russia’s biggest buyers, capitalizing on the excess supply left in the global markets. Data for the months of September and October indicate that India’s crude oil imports from Russia started to increase, squeezing out more expensive inflows from Saudi Arabia and Iraq which have been supplying the world’s fastest growing emerging economy in recent years. India’s foreign minister commented that it is in the government’s best interest to ensure consumers have access to international markets with the best possible terms and “in that respect, quite honestly we have seen that the India-Russia relationship has worked to our advantage”.

Zero covid policy defended

The world’s second largest economy and manufacturing powerhouse China dismantled any hopes for loosening of its strict zero covid policy stance this week as covid outbreaks resurge across its major cities. Hopes for a gradual reopening which could spark a rebound in energy demand were practically subdued as authorities maintain their tight grip. That as consequence, intensifies market worries since the slowdown of the manufacturing activity of the Chinese economy alongside the lockdowns could foreshadow an impending recession which could spill over in the international scene, which could intensify market worries for the demand side of oil.

Technical Analysis

WTI Cash H4

Looking at WTICash 4-hour chart we observe the price action drop during this week towards the 85.17 (S1) support level and the price is currently attempting to break below. We hold a bearish outlook bias for the future price action of WTI as indicated by the descending trendline and supporting our case is the RSI indicator currently registers a value of 30 highlighting the bearish sentiment surrounding the commodity. Furthermore, we also note the flirting of the price action with the lower bound of the Bollinger band showcasing that the bears are currently in control. Should the bears continue to reign over, we may see the definitive break below the 85.17 (S1) support level and the possible break below the 81.17 (S2) support base. Should on the other hand the bulls take over, we may see the reversal and price action rising, breaking above the descending trendline and challenging the 88.88 (R1) resistance barrier.

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Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.

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