Easing Inflation Sparks Bullish Sentiment in Oil Markets

US Job Market and Fed Rate Expectations

Crude prices edged up on Thursday after data showed a stabilizing U.S. job market, fueling expectations that the Federal Reserve could begin cutting interest rates by autumn. Lower interest rates are anticipated to stimulate economic activity, potentially boosting oil demand.

West Texas Intermediate (WTI) and Brent are up slightly for the week, but have lost 3% and 5.2%, respectively, this month.

Initial claims for unemployment benefits fell to 222,000, down from 232,000 the previous week, indicating underlying strength in the labor market despite signs of a cooling broader economy. Futures traders are now factoring in a higher probability of a September rate cut as inflation eases slightly, aligning with the Fed's objectives.

Economic Indicators and Market Reactions

Economic data this week presented mixed signals for crude traders. The producer price index (PPI) rose by 0.5% in April, indicating some inflationary pressure. However, the consumer price index (CPI) met expectations with a modest 0.3% rise, suggesting easing inflation. Single-family homebuilding and manufacturing output both declined, suggesting economic deceleration. US Treasury yields fell, with the 5-year note dropping by 10.9 basis points, reflecting market relief and expectations of future rate cuts. Lower interest rates generally reduce borrowing costs, potentially increasing industrial activity and energy consumption.

EIA Report on US Oil Inventories

According to the Energy Information Administration (EIA), U.S. crude stockpiles fell by 2.5 million barrels last week, driven by increased refining activity and fuel demand. Refinery runs rose by 307,000 barrels per day, boosting utilization rates to 90.4% of capacity. Despite the drawdown, gasoline demand remains below seasonal norms, which raises concerns ahead of the peak summer driving season. Gasoline stocks fell by 235,000 barrels, while distillate inventories dropped by 45,000 barrels, indicating higher demand for diesel and heating oil. A sustained increase in refining activity could support crude prices by indicating robust downstream demand.

IEA and OPEC Demand Forecasts

The International Energy Agency (IEA) revised its 2024 oil demand growth forecast down to 1.1 million barrels per day, citing weaker industrial activity and a mild winter. This contrasts sharply with OPEC's forecast of a 2.25 million barrels per day increase, highlighting a significant divergence in expectations. The IEA's cautious outlook suggests potential oversupply concerns, especially if non-OECD demand, primarily from China, does not compensate for the decline. The discrepancy between the IEA and OPEC forecasts underscores uncertainty in global demand projections, crucial for traders to consider.

Impact on Supply and Demand Trends

The U.S. economic slowdown, indicated by a 0.3% drop in manufacturing output and declining single-family homebuilding, could dampen crude demand. However, the potential for lower interest rates may eventually stimulate economic activity and increase energy consumption. The EIA's report of a 2.5 million barrel drop in inventories and rising refinery runs suggests a current uptick in demand, which could support prices if sustained. On the supply side, OPEC+ production cuts and logistical constraints in the U.S. and Brazil could limit supply growth, tightening the market and potentially supporting higher prices.

Weekly Light Crude Oil Futures

Trend Indicator Analysis

The main trend is up, but momentum has shifted to the downside, following the closing price reversal top the week-ending April 12.

This chart pattern is not a change in trend, but a correction to alleviate some of the upside pressure. Furthermore, it tends to end, following a 50% to 61.8% retracement of the last rally. This puts $76.91 to $74.49 on the radar. This zone was successfully tested two weeks in a row, which suggests the arrival of new value-seeking buyers.

A trade through $87.13 will signal a resumption of the uptrend. The main trend will change to down on a move through $66.68.

Weekly Technical Forecast

The direction of the Weekly Light Crude Oil Futures market the week-ending May 24 is likely to be determined by trader reaction to $78.11.  

Bullish Scenario

A sustained move over $78.11 will signal the presence of strong buyers. If this creates enough near-term momentum then we could see an acceleration into the minor 50% level at $82.01 over the near-term.

Bearish Scenario

A sustained move under $78.11 will indicate the presence of sellers. This could lead to a retest of the short-term retracement zone at $76.91 to $74.49. Bullish traders are likely to read a break back into this area as a buying opportunity since it is also a value zone so watch for a technical bounce on new buying. Holding this area could create a rangebound trade. Look out below if $74.49 is taken out with conviction.

Short-Term Forecast:  Bullish Outlook

Given the easing inflation, the potential for an early Federal Reserve rate cut, and signs of increasing fuel demand, the short-term outlook for crude oil prices is cautiously bullish. If the Fed cuts rates sooner than expected, economic activity could accelerate, boosting oil demand. Traders should watch for a potential price range of $70-$75 per barrel in the near term, contingent on sustained refining activity and inventory drawdowns. However, remain vigilant for economic indicators and OPEC+ decisions in June, which could significantly influence market trends. Continued strong refining activity and lower inventories suggest upward pressure on prices.

Technically speaking, building a support base at or near the $76.91 to $74.49 retracement zone will signal the presence of buyers. But, unless buyers can overcome the $82.01 weekly pivot, prices are likely to remain rebound.

The weekly chart pattern supports the notion of a cautiously bullish trade, however, it’s going to take some strong buying to defend the value zone in order to support a near-term rally. The height of a rally is usually determined by the width of its base. Without a strong support base, rallies are likely to be short-lived.