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Crude Oil Prices May Rise if Stockpiles Fall, FOMC Meeting Eyed

Crude Oil Prices May Rise if Stockpiles Fall, FOMC Meeting Eyed

Margaret Yang, CFA, Former Strategist

CRUDE OIL PRICE OUTLOOK:

  • API reported a surprise draw in inventories, which may help to underpin oil prices
  • WTI hovered near US$ 64.7 ahead of the FOMC meeting, with the US Dollar closely watched
  • Reflation and stimulus hopes have largely been baked in, rendering oil prices susceptible to a technical pullback should the central bank deliver a hawkish-biased message
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Crude oil prices were little changed during Wednesday’s APAC session as traders await fresh catalysts from the upcoming FOMC meeting. The American Petroleum Institute (API) reported a surprise draw in crude inventories of 1.05 million barrels for the week ending March 12th, compared to a baseline forecast of a 2.7-million-barrel build. This suggests that demand is picking up at a faster-than-expected pace as refineries resume operating after February’s cold blast.

Previously, data released by the Energy Information Administration (EIA) pointed to a large inventory build over the prior two weeks as extreme weather dented refinery capacity. The EIA will release the latest weekly data today, in which markets foresee a 2.7-million-barrel increase in stockpiles after a 13.80-million-barrel risepreviously.

Source: Bloomberg, DailyFX

While falling stockpiles may be perceived to underpin oil prices, traders were largely staying on the sideline waiting for the Federal Reserve to paint a clearer picture of economic and monetary policy outlook later today. The US Dollar index (DXY) edged higher for a fourth day, reflecting a cautious note from investors as fears of a ‘taper tantrum’ escalated recently. Although many expect the Fed to keep the policy rate and asset purchasing program unchanged for the time being, a clear improvement in job market conditions and the economic outlook may lead to changes in the dot plot to reflect a faster pace of recovery.

The US Dollar and crude oil prices have tended to exhibit a negative relationship, with their past 12-month correlation coefficient standing at -0.818 (chart below). Should the Fed deliver a hawkish-biased message and boost the US Dollar, oil prices will probably see a deeper pullback.

Source: Bloomberg, DailyFX

WTI has surged more than 80% from early November, backed by reflation hopes, stimulus efforts and a prompt rollout of vaccines around the globe. Restraint by OPEC+ and its allies in production hikes has further strengthened the oil price outlook alongside demand optimism. A magnificent 4-month rally, however, renders oil prices susceptible to technical pullbacks as the bullish drivers appear to have been baked-in already.

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Technically, WTI retreated from the 200% Fibonacci extension level of 66.50 and entered a minor correction. The overall trend remains bullish and is well-supported by the 20-day Simple Moving Average (SMA) line. A daily close below the 20-day SMA (63.06) would likely intensify near-term selling pressure and carve a path for price to test a key support level at 62.19 (the 161.8% Fibonacci extension). The MACD indicator is diverging from prices movements, pointing to a weakening upward momentum.

WTI Crude Oil PriceDaily Chart

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--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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