Oil’s bearish tendencies hit the floor?

Oil prices have tended to lose some ground since last Thursday, yet a stabilization seems to be prevailing. In this report, we aim to shed light on the factors driving WTI’s (Oil) price over the past week, assess its future outlook, and conclude with a technical analysis of WTI.

Oil Report and Analysis

The situation in the US

Making a start with the situation in the US wti market we note that in last week’s release, the Baker Hughes’ report showed that the number of active US wti drills has increased for a third week in a row, this time by 2, in a signal that demand is on the rise. On the flip side though we note that both API and EIA reported an increase of US oil inventories, despite a relative divergence in the numbers as such and thus tend to imply that demand for wti was not able to surpass production levels. Should US oil inventories continue to rise especially if the rise as such widens we may see the situation having an adverse effect on oil prices.

Yet at this point, we would like to have a look at a deeper fundamental level of the situation in the US oil market. The Fed’s decision to keep interest rates unchanged, tended to solidify the market’s expectations that the bank has reached its terminal rate and despite the financial environment remaining tight, that may allow economic activity in the US to improve further, thus increasing the demand for oil and thus pushing oil prices higher. It should be noted that the Fed’s decision tended to weaken the USD and should that bearish tendency be intensified we may see it having a bullish effect on oil prices.

On the other hand we note that economic activity in the US manufacturing sector has contracted for the month, which in turn may imply a reduction of oil demand in the US. On the other hand, we note that the US oil output, according to Reuters, has reached record levels and shale oil producers have become more efficient, a tendency that if continued could boost the production side of the US wti market and have an adverse effect on wti prices. Yet have to note that there is a fine equilibrium here, as lower prices may discourage shale wti producers from increasing production levels.    

The Israeli conflict

The situation in the Middle East remains tense and the humanitarian crisis seems to be escalating, yet market worries for a possible widening of the conflict with the insertion of other forces, for example, other Arab countries, Iran or Hezbollah, seem to have eased. The easing of market worries was also one of the factors that allowed oil prices to drop somewhat over the past week.

Nevertheless, the situation is still considered as being dynamic and unexpected developments escalating the conflict may emerge and could take the market by surprise and push wti prices higher. Yet we have also to note that there is an increased conviction that the conflict has to reach an end at some point and that negotiations have to start. Uncertainty is still running high though and it’s characteristic that Reuters reports that oil traders will pay premiums to  secure annual supply of Mid-Eastern crude oil.

China’s demand

The release of China’s manufacturing PMI figures for October in the past few days has not been so encouraging for oil traders. Both readings the one issued by China’s state National Bureau of Statistics and the other by private Caixin, dropped just below the reading of 50, implying a slight contraction of economic activity in China’s huge manufacturing sector. The release tended to highlight how Chinese factories are struggling and stoked worries among oil market participants for a possible slowing of wti demand in the manufacturing giant. Overall should the situation continue to indicate that the economic recovery of China’s manufacturing sector is facing headwinds, we may see the issue exercising a bearish effect on oil prices. 

Oil: Technical Analysis

نمودار چهار ساعته WTI

• Support: 80.75 (S1), 77.50 (S2), 73.75 (S3)
• Resistance: 84.50 (R1), 87.50 (R2), 91.50 (R3)

On a technical level, we note the bearish tendencies of WTI since last week’s report, yet also note that temporarily the commodity’s price seems to have hit the floor at the 80.75 (S1) support line. We tend to maintain a bearish outlook for the commodity’s price as long as the downward trendline guiding the commodity’s price since the 27  of October, remains intact.

Yet we also note that the RSI indicator is rising, nearing the reading of 50, implying that the bearish sentiment of the market for WTI seems to be fading away, allowing for some tendencies of stabilization, it’s characteristic that the price action seems to have entered a bearish triangle. Should the bears maintain control over the commodity’s price action we expect WTI to break the 80.75 (S1) support line and take aim of the 77.50 (S2) support base and as an ultimate target for the bears in the week we set the 73.75 (S3) support level.

On the flip side, for a bullish outlook regarding the commodity’s price, we would require the price action to break initially the prementioned downward trendline, in a first signal that the downward motion has been interrupted, yet would also require WTI’s price to 84.50 (R1) resistance nest initially clearly and aim for the 87.50 (R2) resistance level.

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