Bullish Forecasts Support Crude Prices

U.S. West Texas Intermediate crude oil futures are trading lower on Friday, but are still in a position to finish higher for the week. Today’s move has nearly wiped out all of yesterday’s gains after renewed recession fears dampened an improved demand outlook by the International Energy Agency (IEA).

Last week, crude oil prices fell sharply on fears that rising inflation and interest rates will hit economic growth and demand for fuel.

The playing field changed this week for the better, however, after softer-than-expected U.S. inflation data drove down the odds of a super-sized Fed rate hike in September and the IEA released a report that called for higher demand.

An unexpected drop in gasoline inventories was another supportive catalyst while a sharp rise in crude oil inventories and the possibility of an Iran Nuclear deal weighed on prices.

Energy Information Administration Gasoline Inventory Data Bullish

U.S. crude oil stocks rose by 5.5 million barrels in the most recent week, the U.S. Energy Information Administration said, more than the expected increase of 100,000. However, U.S. gasoline stocks fell sharply as implied demand rose after weeks of lackluster activity during what is supposed to be peak summer driving season.

Crude Rebounds after IEA Hikes 2022 Demand Growth Forecast

The IEA raised its oil demand growth forecast for the year as soaring gas prices drive some consumers to switch to oil.

“Natural gas and electricity prices have soared to new records, incentivizing gas-to-oil switching in some countries,” the Paris-based agency said in its monthly oil report, in which it raised its outlook for 2022 demand by 380,000 barrels per day (bpd) to 2.1 million bpd.

“These extraordinary gains, overwhelmingly concentrated in the Middle East and Europe, mask relative weakness in other sectors,” the IEA warned.

US Headline, Core Consumer Inflation Post Smaller-than-Expected Increases

The headline consumer price index for July rose 8.5% year over year, and was flat compared to June. Economists surveyed by Dow Jones were expecting increases of 8.7% and 0.2%, respectively.

Core inflation, which strips out volatile food and energy prices, also saw a smaller-than-expected increase.

Lower inflation could encourage the Fed to rein in the size of future rate hikes, pressuring the U.S. Dollar. A lower dollar could drive up foreign demand for crude oil.

Weekly Technical Analysis

Weekly September WTI Crude Oil

Trend Indicator Analysis         

The main trend is up according to the weekly swing chart. However, momentum has been trending lower since the week-ending June 10.

The minor trend is down. It changed to down six weeks ago when sellers took out the minor bottom at $99.66. This confirmed the shift in momentum. The new minor top is $101.88. A trade through this price will change the minor trend to up and shift momentum to the upside.

Retracement Level Analysis

The intermediate range is $60.99 to $118.08. Its retracement zone at $89.54 to $82.80 is support. This area stopped the selling at $88.23 on July 14 and at $87.01 the week-ending August 5. It’s currently being tested.

The main range is also the contract range at $35.00 to $118.08. Its retracement zone at $76.54 to $66.74 is the major area controlling the long-term direction of the market.

On the upside, the nearest resistance is a minor pivot at $94.45, followed by a second pivot at $99.08 and the short-term retracement zone at $102.55 to $106.21.

Weekly Technical Forecast

The direction of the September WTI crude oil market the week-ending August 19 will be determined by trader reaction to the main 50% level at $89.54 and the minor pivot at $94.45.

Bullish Scenario

A sustained move over $94.45 will indicate the presence of buyers. If this move creates enough upside momentum then look for a rally into the second minor pivot at $99.08, additional resistance will come in at $102.55 to $106.21.

Bearish Scenario

A sustained move under $89.54 will indicate the presence of sellers. This could lead to a test of the Fibonacci level at $82.80.

A failure to hold $82.80 will put the market in a weak position. This could extend the selling into the major retracement zone at $76.54 to $66.74. This is the last potential support before the main bottom at $60.99. A trade through this level will change the main trend to down.

Short-Term Outlook

Although buyers may have found value at a long-term retracement zone at $89.54 to $82.80, they are still searching for a catalyst to trigger a resumption of the uptrend. Some thought the IEA’s stronger demand expectations would do the trick, but Friday’s price action suggests it may have not been enough to erase recessionary fears.

Experts expect to see an economic downturn but the size and duration are unpredictable at this time. Additionally, evidence this week suggests inflation may be slowing. However, Fed comments indicate that policymakers are likely to remain hawkish while calling for aggressive rate hikes until inflation is subdued.

That being said, we’re expecting to see a choppy trade over the near-term until there is clarity about the demand outlook, or unless there is a major supply disruption.

Technically speaking, even if buyers are able to overcome $94.45, bullish traders still face an uphill battle with resistance layered at $99.08, $102.55 and $106.21.