BRENT & WTI CRUDE OIL ANALYSIS & TALKING POINTS
- OPEC+ production cut continues to dominate headlines by complicating supply dynamics and global central bank policies.
- US economic releases under the spotlight this week for crude oil.
- Brent and WTI reaching short-term peak?
BRENT/WTI CRUDE OIL FUNDAMENTAL BACKDROP
Crude oil prices (WTI and Brent) have extended their gains after the weekend’s shocking production cut announcement by OPEC+. Forecasts have already shown the oil market to be in a deficit towards the end of 2023 which should now be increased and supportive for crude oil bulls. This will put pressure on the US and their stockpiles who may need to tap into their SPR inventory once more – SPR is usually used to stabilize oil markets in times of supply disruptions. The problem with this traditional safety net is that SPR stocks have fallen significantly and now reflect levels last seen in the 1980s – refer to graphic below.
WEEKLY US ENDING STOCKS OF CRUDE OIL IN SPR
Source: US Energy Information Administration
The impact on the U.S. dollar has been muted for now although a marginal hawkish repricing has taken place in terms of upcoming Fed interest rate probabilities. Inflation remains the biggest concern and I believe that markets are still trying to analyze the bearing on the global economy (if any) and how central banks would have to adapt. Economic theory suggests that higher oil prices could lead to higher inflation and possibly growing recessionary fears. This would be catastrophic for financial markets. If we look at the US ISM manufacturing PMI report from yesterday which missed estimates; the US economic forecast for 2023 could be slowing as a leading indicator for the US economy. Should this trend echo around the globe, oil demand would fall. That leaves much focus on the Chinese economy with their government looking to stimulate growth via fiscal policy; however, with China’s Caixin manufacturing PMI read pushing contractionary territory levels once more, optimism around the China re-open is dwindling and so could crude oil prices.
There is little in the way of US economic data today but focus will be given to Federal Reserve speakers including the Fed’s Cook and Mester. From a crude oil perspective, the API report is due later this evening and another fall in the weekly change release could add to the current bullish bias.
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U.S. ECONOMIC CALENDAR
Source: DailyFX economic calendar
TECHNICAL ANALYSIS
BRENT CRUDE OIL PRICE CHART (DAILY)
Chart prepared by Warren Venketas, IG
Daily Brent crude oil price action has peered above the 85.00 handle and a daily close above could see an extension of the upside. That being said, the Relative Strength Index (RSI) is nearing overbought territory so anything beyond the swing high at 86.70 should be approached with caution.
Key resistance levels:
- 200-da SMA (blue)/90.00
- 86.70
Key support levels:
- 85.00
- 82.38
WTI CRUDE OIL PRICE CHART (DAILY)
Chart prepared by Warren Venketas, IG
WTI crude oil is currently sandwiched between the 80.00 – 82.00 psychological levels with similar readings on the RSI as Brent. Much will be decided by upcoming US fundamental data later this week and should be monitored closely.
Key resistance levels:
- 83.32
- 82.00
Key support levels:
- 80.00
- 78.01
IG CLIENT SENTIMENT: BULLISH
IGCS shows retail traders are NET LONG on crude oil, with 54% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment however, due to recent changes in long and short positioning we arrive at a short-term upside disposition.
Contact and followWarrenon Twitter:@WVenketas
