Better-Than-Expected Inflation Data Sparks Hope For Oil Markets

U.S. West Texas Intermediate crude oil futures closed higher on Thursday after recapturing earlier losses. The catalyst behind the price reversal was milder-than-expected U.S. consumer inflation data. The economic news offset worries over renewed COVID-curbs in China and their potential effect on fuel demand, triggering an intraday short-covering rally.

Crude Oil Rises after Light Consumer Inflation Report

October’s consumer price index rose just 0.4% for the month and 7.7% from a year ago, its lowest annual increase since January and a slowdown from the 8.2% annual pace in the prior month. Economists were expecting increases of 0.6% and 7.9%, according to Dow Jones.

Excluding volatile food and energy costs, the core CPI increased 0.3% for the month and 6.3% on an annual basis, also less than expected.

How Does Lower Inflation Affect Crude Oil Prices?

Treasury yields plunged after the CPI report, with the benchmark 10-year Treasury yield falling roughly 30 basis points to 3.81% as traders bet the Federal Reserve would slow its aggressive tightening campaign that’s weighed on markets all year.

The drop in yields weakened the U.S. Dollar, helping to drive up demand for dollar-denominated crude oil. With today’s CPI number coming down, the market is now betting pretty clearly that they believe the interest rate hikes are coming close to an end.

This likely means more pressure on the greenback and perhaps more foreign interest in dollar-based U.S. WTI crude oil

Furthermore, with the labor market remaining strong, it could also mean the U.S. may have avoided a recession, which would have likely led to demand destruction and lower crude oil prices.

Renewed COVID Curbs in China Exerting Pressure

A week ago crude oil prices were moving sharply higher on the back of unverified reports that China was preparing to announce it would begin relaxing its strict COVID restrictions in early 2023. This story was put to bed over the weekend when officials said they would continue to impose tight curbs.

Driving the market sharply lower are reports of increasing COVID cases in parts of China, and renewed restrictions to control the spread of the virus.

Reuters is reporting that the manufacturing hub of Guangzhou, a city of 19 million people, on Thursday reported more than 2,000 new cases for Nov 9, the third day above that level, in the city’s worst outbreak so far. Additionally, millions of residents were told to get tested for COVID-19 on Wednesday, and one city district has been locked down, as local cases across China reached their highest since April 30.

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. A new minor top has formed at $93.74. A trade through this level will reaffirm the minor uptrend. A trade through the minor bottom at $81.30 will change the minor trend to down. This will also shift momentum to the downside.

Retracement Level Analysis

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 and potential resistance zone. It stopped the rally this week at $93.74.

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 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 the week-ending November 18 is likely to be determined by trader reaction to the 50% level at $85.49.

Bullish Scenario

A sustained move over $85.49 will signal the presence of buyers. This could lead to a retest of the retracement zone at $93.24 to 97.38, followed by the main top at $95.55 and 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 $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

Not only did concerns over lower demand drive prices lower initially on Thursday, but a rise in U.S. stockpiles also weighed on prices, but not that much since gasoline and distillate stockpiles declined. However, the selling pressure didn’t accelerate to the downside because it’s is still being underpinned by the OPEC+ production cuts and the upcoming European Union embargo of Russian oil.

I don’t think the current sell-off is bearish per se. I do think that speculative bulls were removing the premium they put in the market last week when they were betting on China relaxing its COVID curbs.

Inventories are tight and likely to get tighter over the near term, but traders have to find value first before they stop selling. The key area to watch for WTI futures is $84.72 to $82.59.

With crude oil prices nearly at support, favorable CPI data, and a weaker U.S. Dollar, the bottoming process may have already begun on Thursday. All the market needs is a catalyst to spark a rally. This catalyst will be improving COVID conditions in China.

There is enough bullish news on the supply side to support a rally, but bullish news on the demand side will be needed to drive prices back toward the psychological $100 level.