A Sustained Oil Rally Seems Unlikely Amid Rampant Inflation

U.S. West Texas Intermediate crude oil futures are in a position to finish the week lower after a promising finish the prior week. The selling pressure started early Monday with the market sinking nearly 2% after five straight sessions of gains. The catalyst behind the weakness was growing worries that the gathering of economic storm clouds could be foreshadowing a global recession that could erode fuel demand.

Fed Rate Hike Worries Fuel Recession Fears

Crude oil prices were capped early in the week amid comments from U.S. Federal Reserve officials about rising interest rates and their effect on the economy.

Fed Vice Chair Lael Brainard said the economy is starting to feel more restrictive monetary policy, but the full brunt of the central bank’s interest rate hikes will not be apparent for months.

Brainard’s comments followed remarks by Chicago Fed President Charles Evans that there was a strong consensus at the Fed to raise the target policy rate to around 4.5% by March and hold it there.

China COVID Flare-Up Contributes to Bearish Tone

Prices continued to weaken mid-week as recession fears and a flare-up in COVID-19 cases in China raised concerns over global demand.

World Bank President David Malpass and International Monetary Fund Managing Director Kristalina Georgieva warned of a growing risk of a global recession and said inflation remained a continuing problem.

Fears of a further hit to demand in China also weighed. Authorities have stepped up coronavirus testing in Shanghai and other large cities as COVID-19 infections rise again.

Hot US Inflation Reading Fans Bearish Flames

Crude oil futures fell sharply early Thursday shortly after a key consumer inflation report came in hotter than expected, signaling that the Federal Reserve will likely continue with aggressive interest rate hikes.

The U.S. Consumer Price Index (CPI) rose 0.4% in September, above the 0.3% expected by economists according to Dow Jones. Core CPI, which strips out food and energy, was up 0.6% month over month, also higher than expected.

Ahead of the report, the crude oil market was flat as traders continued to weigh last week’s decision to cut supplies by OPEC and its allies against a warning from the International Energy Agency (IEA) that those cuts may push the global economy into recession. However, stubborn inflation likely moved the U.S. closer to recession.

The CPI reading likely cements the chances of another 75-basis-point rate hike by the Fed at its November 1-2 policy meeting. With some investors fearing rates are being hiked too quickly and the central bank is dragging the U.S. economy into a recession, some crude oil experts are already anticipating lower demand for energy products.

OPEC Cuts 2022, 2023 Oil Demand Outlook

OPEC on Wednesday cut its 2022 forecast for growth in world oil demand for a fourth time since April and also trimmed next year’s figure, citing slowing economies, the resurgence of China’s COVID-19 containment measures, and high inflation, Reuters reported.

Oil demand will increase by 2.64 million barrels per day (bpd) or 2.7% in 2022, the Organization of the Petroleum Exporting Countries (OPEC) said in a monthly report, down 460,000 bpd from the previous forecast.

OPEC+ Oil Production Cuts Could Tip World into Recession:  IEA

A decision by the OPEC+ oil producer group last week to rein in output has driven up prices and could push the global economy into recession, the International Energy Agency said on Thursday.

“The relentless deterioration of the economy and higher prices sparked by an OPEC+ plan to cut supply are slowing world oil demand,” the Paris-based agency, which includes the United States and other top consumer countries, said.

“With unrelenting inflationary pressures and interest rate hikes taking their toll, higher oil prices may prove the tipping point for a global economy already on the brink of recession,” it added in its monthly oil report.

WTI Prices Rebound Following Bullish EIA Stats

After reacting to the mostly gloomy demand outlook throughout the week, bullish traders finally received a little friendly news from the supply front on Thursday, following the release of weekly government inventory numbers.

Oil prices settled about 2% higher on Thursday, as low levels of diesel inventory ahead of winter triggered buying and reversed early losses on surprisingly high stocks of crude and gasoline.

Distillate stockpiles, which include diesel and heating oil, fell by 4.9 million barrels in the week ended October 7, the U.S. Energy Information Administration (EIA) said, far exceeding expectations for a drop of 2 million barrels and bringing inventories to 106.1 million barrels, lowest since May.

The diesel news prompted investors to shrug off a surprise 2 million build of gasoline stocks and a larger-than-expected near 10 million barrel rise in crude inventories.

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis        

The main trend is down. However, momentum has shifted to the upside following the confirmation of the closing price reversal bottom from the week ending September 30.

A move through $95.55 will change the main trend to up. A trade through $75.70 will signal the resumption of the downtrend.

The minor trend is up. It changed to up last week when buyers took out $88.83. The move confirmed the shift in momentum.

Retracement Level Analysis

The main range is $60.20 to $110.78. The market is currently trading on the bullish side of its retracement zone at $85.49 to $79.52, making it support.

The minor range is $95.55 to $75.70. Its 50% level at $85.62 is additional support.

The short-term range is $110.78 to $75.70. With momentum shifting to the upside, its retracement zone at $93.24 to $97.38 becomes the primary upside target.

The contract range is $34.75 to $110.78. Its retracement zone at $72.77 to $63.79 is the next major downside target and value zone.

Weekly Technical Forecast

The direction of the December WTI crude oil market for the week-ending October 21 is likely to be determined by trader reaction to the 50% level at $93.24.

Bullish Scenario

A sustained move over $93.24 will signal the presence of buyers. This could lead to a quick test of the main top at $95.55, followed by the Fibonacci level at $97.38. The latter is a potential trigger point for an acceleration to the upside.

Bearish Scenario

A sustained move under $93.24 will indicate the presence of sellers. This could trigger a quick break into the main 50% level at $85.49.

A sustained move under $85.49 will indicate the selling pressure is getting stronger. This could trigger an acceleration into the Fibonacci level at $79.52. This is the last support before the main bottom at $75.70. Taking out this level will signal a resumption of the downtrend.

Short-Term Outlook

Crude oil’s bearish reaction to the hotter-than-expected CPI data indicates how difficult it is going to be to build a sustainable rally on the back of very high inflation and the expectation that the Federal Reserve is going to be more hawkish than ever.

Although crude oil prices were able to rebound on Thursday following the bullish diesel supply number, I don’t think that tight supply concerns will be enough to sustain a long-term rally given the doom and gloom being generated by the Fed rate hikes.

Technically, the weekly chart pattern indicates we’re likely in for more volatile range bound trading with bullish investors willing to test the upper resistance range at $93.28 to $97.42, and bearish traders likely to probe two key support areas at $85.49 to $84.02 and $82.06 to $79.52.

It seems like we’ve entered the “sell the rally, buy the dip” zone. We’re likely to stay inside this zone until traders can determine if OPEC+’s decision to cut production will help stabilize prices, or if the series of global central bank rate hikes cause a recession.