Bullish Refinery Data From China Lifts Oil Prices

September West Texas Intermediate (WTI) crude oil futures experienced another volatile week, culminating in a 3% increase to reach a one-week high on Thursday. Several factors contributed to this rise, including a weaker U.S. dollar and a significant surge in refinery runs in China, the world's top crude oil importer. This positive performance helped the market recover from earlier losses, which puts it in a position to end the week on an upward trajectory.

Supply and Demand Factors

The bullish sentiment in the oil market was supported by multiple supply and demand factors. Firstly, the gasoline crack spread, which measures refining profit margins, reached its highest level since July 2022 in the United States. This is indicative of strong demand for gasoline relative to the cost of crude oil. The high crack spread incentivizes refiners to increase gasoline production, driving up the demand for crude oil as feedstock and ultimately boosting oil prices.

Additionally, reports from the U.S. revealed an unexpected increase in retail sales for May and higher-than-expected jobless claims, leading to a weakening of the U.S. dollar. A weaker dollar makes crude oil more affordable for holders of other currencies, stimulating oil demand.

China's oil refinery throughput also played a crucial role in the market rally. Data showed a significant 15.4% year-on-year increase in refinery throughput in May, reaching its second-highest level on record. Analysts expect Chinese demand for oil to continue rising steadily throughout the second half of the year, contributing to overall bullish sentiment.

Furthermore, Kuwait Petroleum Corp's chief executive expressed confidence in continued robust demand for oil from China, emphasizing their long-standing relationships with major Chinese customers. The stability of Kuwait's market share in China, despite increasing Russian exports due to Western sanctions, further supports positive demand outlook.

Central Banks, Interest Rates, and the US Dollar

Central banks' actions and interest rate policies also impacted the oil market. The European Central Bank (ECB) raised interest rates to a 22-year high, signaling further policy tightening to combat high inflation. However, the outlook for economic growth and inflation remains uncertain, reflecting the potential challenges that lie ahead.

In contrast, the U.S. Federal Reserve decided to keep interest rates unchanged for the time being. Nevertheless, they signaled a potential increase of at least 0.5% by the end of the year. Higher interest rates can increase borrowing costs for consumers, potentially slowing economic growth and reducing oil demand.

The weakening U.S. dollar, driven in part by the pause in interest rate hikes by the Federal Reserve, made crude oil more affordable for holders of other currencies. This factor further stimulated oil demand and contributed to the bullish outlook.

Predictions and Analyst Insights

UBS, a prominent financial institution, predicts a supply deficit of around 1.5 million barrels per day (bpd) in June and over 2 million bpd in July. They expect these deficits to become visible in on-land oil inventories, leading to a trend of higher oil prices. However, it should be noted that the unexpected large build in U.S. crude oil stockpiles last week and the across-the-board inventory increases for gasoline and distillates are considered bearish signals for the oil markets.

Goldman Sachs revised its oil price forecasts downward due to higher-than-expected supplies later this year and through 2024. Their revised forecast stands at $86 per barrel for Brent, down from $95, and $81 per barrel for WTI, down from $89. This revision likely influenced the start of the week's decline in oil prices.

The International Energy Agency (IEA) forecasts that the boost in oil demand from the post-pandemic recovery will diminish this year. A slowing economy and the transition to cleaner fuels are expected to reduce growth, especially from 2024 onwards. While China and India contribute to growth this year, the increased use of electric vehicles will lead to a significant decline in demand. The IEA also emphasized the need for additional policy measures and behavioral changes to achieve net-zero emissions by 2050.

Weekly Technical Analysis

Weekly September WTI Crude Oil

Trend Indicator Analysis             

The main trend is down according to the weekly swing chart. A trade through $64.22 will reaffirm the downtrend. A move through $81.44 will change the main trend to up.

Retracement Level Analysis

The contract range is $37.66 to $96.50. Its retracement zone at $67.08 to $60.14 is the major support. The market successfully tested this area earlier in the week, stopping at $66.98 and during the week-ending May 5 at $64.22. The price action over the past three months indicates that this area is a value zone.

The minor range is $81.44 to $64.22. Its retracement zone at $72.83 to $74.86 is resistance. It stopped the rally the week-ending June 9 at $74.99. The market would have to overcome this zone for speculators to get excited about its upside potential.

Weekly Technical Forecast

The direction of the September WTI crude oil market the week-ending June 23 is likely to be determined by trader reaction to the major 50% level at $67.08.

Bullish Scenario

A sustained move over $67.08 will signal the presence of aggressive counter-trend buyers. This could lead to a quick test of the minor 50% level at $72.83, followed by the minor Fibonacci level at $74.86. Overcoming this level could trigger an acceleration to the upside.

Bearish Scenario

A sustained move under $67.08 will signal the presence of sellers. This could lead to a retest of the main bottom at $64.22. This level has to hold or prices could collapse into long-term Fibonacci level at $60.14.

Short-Term Outlook - Volatile but Bullish

WTI crude oil experienced a week of fluctuations but is in a position to end the period on a positive note. Factors such as a weaker U.S. dollar, increased refinery runs in China, and a high gasoline crack spread in the United States contributed to a short-term bullish outlook. Additionally, statements from Kuwait Petroleum Corp's chief executive reinforced expectations of sustained demand from China. On the other hand, the unexpected increase in U.S. crude oil stockpiles and downward revisions in oil price forecasts by Goldman Sachs introduced some bearish sentiment. The actions of central banks, interest rate policies, and the transition to cleaner fuels also influenced the market dynamics. Looking ahead, the IEA's projections highlight the need for further efforts to achieve a sustainable energy transition and reduce oil demand in the long run.

Technically, value seekers are going to have to continue to come in to support the market on pullbacks into major support at $67.08 - $64.22. If they don't, then prices will collapse.

We've already seen that buyers like buying dips, but in order to send prices sharply higher, they are going to have to start buying strength. This will send a message to traders that the buying is serious. It should also chase out a number of weaker short-sellers, further fueling the rally. Overtaking $72.83 will be the first sign of strong buying, while a drive through $74.86 could trigger an acceleration to the upside.