Oil market jitters

Oil prices tended to gain some ground last Thursday yet the upward motion was abruptly interrupted and any gains made were relented, with oil prices being at a lower level than what we had in our last report. 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.

The Israeli conflict

As the week began, market worries for the possible repercussions of the Israeli conflict on the supply side of the oil market tended to ease, as hopes for a possible diplomatic solution may not have been dominant, yet were enhanced, allowing for oil prices to weaken. Yet the IDF ground operation last night in northern Gaza may have been a painful reminder that the possibility of an escalation of the conflict is still a most likely scenario. Yet the extent of the escalation is still unknown. A land operation of Hezbollah, with Israel finding itself fighting on two fronts, is a quite plausible scenario, yet direct hits from neighbouring Arab countries, or even Iran and Turkey, despite being possible, for the time being, remain remote. Yet the possibility of a weaponization of oil seems to be increased and continues to stoke market worries for the supply side of the commodity at an international level. Should Israel’s ground assault on Gaza finally start and especially if it has mass casualties on behalf of Palestinian civilians, tensions are expected to escalate and thus intensify market worries and push oil prices higher. On the other hand a possible delay of Israel’s land operation on Gaza, may ease market worries and allow oil prices to drop lower. We view the situation as the main issue tantalizing the oil market currently.

Venezuelan oil flows into the markets

Yet oil prices did not drop on Monday solely because market worries about the Israeli conflict tended to ease somewhat. Also, it seems that the lifting of the US sanctions on Venezuela has allowed its oil to start flowing into the markets once again, boosting the supply side of the commodity and thus also being a driver to push oil prices lower. Venezuela’s state-run oil company PDVSA has already started to renegotiate with refiners and its characteristic that Reuters reported that “U.S., European and Asian refining firms including Reliance Industries RELI.NS, Tipco Asphalt TASCO.BK, Valero Energy VLO.N, PBF Energy PBF.N, and Eni ENI.MI also are in talks with PDVSA to resume or expand imports of Venezuelan crude”.

Yet at this point, we would like also to highlight the risk of an overestimation of Venezuela’s oil production capacity, as the years-long sanctions may have had also a negative effect on investments in the sector’s infrastructure. Hence we have to expect also at least in the near term some sort of cap on the oil export capabilities of Venezuela. Nevertheless, such limits do not seem to have been met yet, thus it is reasonable to expect that the inflow of Venezuelan oil is to ease the tightness of the commodity’s supply side and thus weigh on oil’s price or at least clip any gains to some degree.

The situation on the ground of the US oil market

Indicators related to the US oil market tended to send some mixed signals in the past week. Characteristically the number of active US oil rigs rose marginally which tended to imply a weak demand rise. Yet API on Tuesday, reported a narrower but still considerable drawdown implying that production was not able to catch up with demand, an element suggesting a relative tightness in the US oil market. That picture was overturned the following day, by the release of the EIA crude oil inventories figure for the past week and reported an increase of US oil inventories. Hence we expect the effect of the releases on oil prices to ease for the time being.

Oil: Technical Analysis

WTI Cash H4 Chart

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

After dropping below the 84.50 (R1) level, WTI’s price seems correct higher and stabilise, revolving around the R1. Given that the downward trendline guiding the commodity’s price action since the 20  of October, has been interrupted, we switch our bearish outlook for a sideways movement bias initially. Please note that the RSI indicator remains below the reading of 50 implying that some bearish tendencies are still possible.

Yet for a clearcut bearish outlook, we would require the commodity’s price to break below the 80.75 (S1) support line, a level that reversed a downward movement of WTI’s price action on the 6  of October and aim for the 77.50 (S2) support level, a level that has not seen any price action since the 24  of the month. Should the bulls take over we may see WTI’s price breaking the 84.50 (R1) resistance line, break the 87.50 (R2) resistance nest and take aim of the 91.50 (R3) resistance barrier.

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