Oil Outlook: Bulls find some relief

WTI bulls seem to have overcome last week’s hesitation and have advanced higher. For the time being we intend to focus on the conditions dominating the US oil market and also keep an eye out on the situation in the emerging issues from Chinese oil refineries. 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.

Oil: Overview Report

The pickup in the US oil market

We note that the number of active oil rigs in the US, decreased according to Baker Hughes figures last Friday, in a signal that signs of demand resiliency in the US oil market may have been premature. On the other hand, we note that API showed a significant decrease in US oil inventories, as US oil inventories were reduced by -5.521M which was significantly lower than the expected figure of 0.400M.

Similarly, also EIA reported a sharp decrease in US oil reserves for the past week, by coming in at -1.536M,  which is less than the 0.90 million barrels expected. Furthermore, the first decline in US Crude oil inventories in the past six weeks may be indicative of aggravated demand surpassing oil production levels. The data tend to indicate an uptick in the demand within the US oil market and could be supporting the recent gains made by oil prices.

China’s Oil refiners slash output

According to a report by BNN Bloomberg, small private oil refineries dubbed Teapots, which are operating out of the Shandong province in China have been reduced to a two-year low. The reduction in oil refineries according to the report, has been attributed to sluggish economic growth in China, which has dampened construction demand, as such heavy machinery which requires a high usage of diesel has been reduced significantly. The teapots appear to be keeping their margins near their 10-year average yet are sacrificing their volume to maintain their aforementioned margins.

Therefore, from a more macro-economic perspective, the struggles faced by small private refineries could be also endured by larger refineries should China’s economic struggles continue and widen. In our opinion, we do not expect to see an immediate impact in China’s state-owned refinery industry, but rather a series of more gradual reductions, beginning from the “Teapots” and eventually making their way to state-owned refineries.

In conclusion, should the Chinese economic recovery continue to be sluggish, it could lead to reduced oil demand from Chinese refineries, which in turn may weigh on oil prices in the long run. For now, the concerns appear to have not impacted the oil markets, but the situation is worth keeping an eye out for the future, should it escalate to an institutional level.

OPEC keeps forecasts unchanged

OPEC according to various media outlets has maintained its forecasts for relatively strong growth in global oil demand in 2024 and 2025. Furthermore, the oil cartel raised its economic growth forecast for the rest of the year, implying a robust demand for global economies as “a continuation of the expected momentum from the beginning of the year could result in upside potential for global economic growth in 2024”. The comments made by OPEC, imply that as the global economy continues to recover, oil demand may also increase which in turn could support oil prices in the long run.

Oil: Technical Analysis

WTI Daily Chart

• Support: 78.65 (S1), 75.80 (S2), 71.60 (S3)
• Resistance: 80.80 (R1), 84.80 (R2), 89.00 (R3)

WTI price action appears to be moving in an upward fashion, having formed an upwards-moving trendline that was incepted on the 26    of February. We maintain a bullish outlook for the commodity and supporting our case is the aforementioned upwards-moving trendline, in addition to the RSI indicator below our chart which currently registers a figure near 60, implying bullish tendencies. Yet there seems to be some difficulty on behalf of the bulls to mark higher highs.

For our bullish oil outlook to continue, we would like to see a clear break above the 80.80 (R1) resistance line, with the next possible target for the bulls being the 84.80 (R2) resistance line. On the other hand, for a sideways bias, we would like to see the price action remaining confined between the 78.65 (S1) support level and the 80.80 (R1) resistance line.

Lastly, for a bearish outlook we would require a clear break below the 78.65 (S1) support level, as well as a clear break below our upwards-moving trendline, with the next possible target for the bears being the 75.80 (S2) support level.

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