Central Bank Action Pushes Oil Prices Down Again

The West Texas Intermediate (WTI) crude oil market experienced a week of volatility, influenced by a combination of supply dynamics and demand factors. The futures contract witnessed a significant decline of approximately 4% on Thursday, erasing the earlier gains for the week. This downturn was primarily triggered by the Bank of England's bigger-than-expected rate hike, which raised concerns about the economy and fuel demand. Despite the support from a surprise draw in U.S. oil supplies, these worries outweighed the positive impact and pushed the U.S. benchmark lower.

Supply Dynamics

The EIA's weekly report on crude oil inventories revealed a notable decline of 3.8 million barrels in the last week, falling to 463.3 million barrels, contrary to analysts' expectations of a 300,000-barrel rise. Additionally, crude stocks at the Cushing, Oklahoma delivery hub fell by 98,000 barrels. These unexpected draws in crude inventories were driven by strong export demand and low imports. Furthermore, U.S. crude oil exports climbed to 4.5 million barrels per day, while imports fell approximately 50% to 1.6 million barrels per day.

However, the positive impact of the decline in crude oil inventories was dampened by builds in gasoline and distillate inventories. Gasoline stocks rose by about 480,000 barrels to 221.4 million barrels, compared to analysts' expectations of a 100,000-barrel rise. Distillate stockpiles, including diesel and heating oil, increased by approximately 430,000 barrels to 114.3 million barrels, although this rise was lower than the expected 700,000-barrel increase.

The increase in crude supplies from Iran and Russia added further bearish sentiment to the market. Iran's crude exports and oil output have hit new highs this year despite U.S. sanctions. Russia's plan to increase seaborne diesel and gasoil exports also outweighed the production cuts made by OPEC and its allies, including Russia itself.

Demand Factors

The demand dynamics in the West Texas Intermediate (WTI) crude oil market were influenced by various factors, including the monetary policies implemented by central banks such as the U.S. Federal Reserve and the Bank of England. The recent monetary policy decisions made by these institutions had an impact on crude oil demand.

The Bank of England's bigger-than-expected rate hike raised concerns about the economy and fuel demand. Higher interest rates have the potential to slow economic growth and reduce oil demand. This cautious approach was echoed by U.S. Federal Reserve Chair Jerome Powell, who indicated the likelihood of two more rate hikes by the end of the year. These statements added to the market's uncertainty and dampened expectations for future oil demand.

The central banks' decisions regarding interest rates have a significant influence on economic growth and consumer behavior, ultimately impacting oil demand. The rate hikes implemented by the Bank of England and the projected rate increases by the Federal Reserve contribute to a more cautious economic outlook, which can potentially translate into reduced fuel consumption and subdued oil demand.

While the central banks' monetary policy decisions played a pivotal role in shaping crude oil demand, it is important to consider other factors as well. Economic indicators, geopolitical tensions, and global economic recovery also contribute to the demand landscape. Despite the cautious economic outlook driven by the central banks' actions, expectations of oil demand growth in China and India during the second half of the year act as a mitigating factor. Despite China's slower economic expansion and smaller-than-expected rate cuts, consumption in both China and India is projected to rise in the coming months. Notably, India's booming aviation sector is expected to contribute significantly to the overall demand growth.

Close monitoring of these various demand factors, including monetary policy developments, economic indicators, and geopolitical situations, will be crucial in assessing the future trajectory of oil demand and its implications for the WTI crude oil market.

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. Buyers 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 30 is likely to be determined by trader reaction to the major 50% level at $72.83.

Bullish Scenario

A sustained move over $72.83 will signal the presence of aggressive counter-trend buyers. This could lead to a quick test of the minor Fibonacci level at $74.86. This price is a potential trigger point for an acceleration to the upside with the resistance cluster at $80.36 - $81.44 the next major near-term target.  

Bearish Scenario

A sustained move under $72.83 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

Considering the combination of supply dynamics and demand factors, the short-term forecast for the West Texas Intermediate (WTI) crude oil market leans towards slightly bearish. The significant decline of approximately 4% on Thursday, triggered by the Bank of England's bigger-than-expected rate hike, raised concerns about the economy and fuel demand. Despite the support from the surprise draw in U.S. oil supplies, these worries outweighed the positive impact and pushed the market lower.

Supply dynamics also contribute to the bearish sentiment. While there was an unexpected decline in crude oil inventories, driven by strong export demand and low imports, builds in gasoline and distillate inventories offset the positive impact. Additionally, the increase in crude supplies from Iran and Russia, despite U.S. sanctions and OPEC production cuts, added further bearish sentiment to the market.

On the demand side, the cautious economic outlook resulting from the central banks' rate hikes, including the Bank of England's recent decision, creates uncertainty and dampens expectations for future oil demand. The potential reduction in fuel consumption and subdued oil demand due to higher interest rates contribute to the slightly bearish forecast.

However, it is important to note that expectations of oil demand growth in China and India during the second half of the year act as a mitigating factor. Despite slower economic expansion and smaller-than-expected rate cuts, consumption in both China and India is projected to rise, with India's booming aviation sector playing a significant role in overall demand growth.