Flurry Of Bearish News Sends Oil Lower

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Friday, threatening to erase this week's gains just one day after the markets hit a four-month high. The price action is being driven by uncertainty over domestic and global economic growth on future demand. Despite the worries, the market continues to be supported by the OPEC-led supply cuts and the U.S. sanctions against Iran and Venezuela.

On Thursday, both WTI and Brent crude oil hit new highs for the year, but both showed little follow-through to the upside when they took out the previous day's high. In fact, both closed lower which indicated the selling may be greater than the buying at current price levels. The price action also suggested investors aren't willing to buy strength at current levels.

When investors aren't confident enough to buy strength, it usually means they are waiting for a catalyst. They have probably grown tired of the narrative about the "OPEC-led production cuts underpinning the market" and would probably like to hear some positive news about the progress of U.S.-China trade talks.

Until they get this news, we're likely going to see a lot of "backing and filling" on the charts as bullish investors are becoming more cautious about chasing the market higher and would most likely prefer to buy on breaks rather than on strength.

Renewed Concerns Over Demand

Worries about demand jumped to the forefront this week, driven by the dovish policy shift by the U.S. Federal Reserve on Wednesday and Friday morning's weaker-than-expected economic news in Europe, which could weigh on future demand.

The U.S. Federal Reserve announced on Wednesday that it was keeping its benchmark interest rate unchanged, while indicating it would not raise rates in 2019. The news was a complete reversal from its policy in December, when the central bank projected two interest rate hikes for 2019.

One reason for the Fed's pause in credit tightening is in response to a slowdown in the U.S. economy. "We foresee some weakening, but we don't see a recession," Federal Reserve Chairman Jerome Powell said Wednesday in a press conference. The Fed also said that while the labor market remains strong, "growth of economic activity has slowed from its solid rate in the fourth quarter." Policymakers also added that a slowdown in the global economy also contributed to its decision to stop its rate hikes in 2019.

On Friday, he IHS Markit's flash composite Purchasing Managers' Index measuring activity in German services and manufacturing, which together account for more than two-thirds of the economy, fell to 51.5, its lowest reading since June 2013.

According to Reuters, "Businesses across the euro zone performed much worse than expected this month as factory activity contracted at the fastest pace in nearly six years, hurt by a big drop in demand."

"Manufacturing is clearly the main area of weakness and concern at the moment. The manufacturing downturn is gaining momentum and will act as an increasing drag on the economy in the second quarter," said Chris Williamson, chief business economist at IHS Markit.

Friday's selling pressure is a direct response to the weakness in Germany and the Euro Zone. The U.S. isn't quite that weak, but if the Fed is willing to take a pause in its tightening then it may foresee problems on the horizon that could eventually lead to lower domestic demand for crude oil.

Supply is Getting Tighter

Perhaps softening the blow over demand concerns is the news that the global supply is getting tighter.

WTI and Brent crude oil have now retraced more than 50% of their sell-off from their October 2018 tops. This rally is tied to the fact that OPEC's crude oil output has slumped from a mid-2018 peak of 32.8 million barrels per day (bpd) to 30.7 million bpd in February.

Furthermore, the U.S. sanctions against Venezuela and Iran are also disrupting supply.

"Venezuelan exports to the U.S. have finally dried up, after the sanctions were placed on them by the U.S. administration earlier this year," ANZ bank said on Thursday.

Traders also expect to see more of an impact from the U.S. sanctions on Iran when the Trump Administration cuts Iran's crude exports by about 20 percent to below 1 million bpd from May by requiring importing countries to reduce purchases to avoid U.S. sanctions.

Finally, according to the U.S. Energy Information Administration, U.S. stockpiles are getting smaller. On Wednesday, the EIA reported that inventory fell 9.6 million barrels, to 439.5 million barrels, during the week-ending March 15. This was the largest drop since July. Additionally, inventories fell to their lowest level since January.

Technical Analysis

Weekly May West Texas Intermediate Crude Oil Technical Analysis

The main trend is up according to the weekly swing chart. However, momentum could shift to the downside if the market closes below $58.82 on Friday. This would form a potentially bullish closing price reversal top. Although the chart pattern will not change the trend, it could lead to the start of a 2 to 3 week correction.

A trade through $60.39 will reaffirm the uptrend, while a break through $54.87 will change the main trend to down.

The main range is $75.80 to $43.46. Its 50% to 61.8% retracement zone at $59.63 to $63.45 is the primary upside target. This week, the market traded inside this zone, posting its high for the week at $60.39. Based on the reaction by traders after this move, it looks as if sellers are defending this resistance area.

The short-term range is $43.46 to $60.39. If the main trend changes to down then look for a correction into its retracement zone at $51.93 to $49.93.

Weekly Forecast

A close under $58.82 will be bearish for May WTI crude oil this week. If confirmed next week then look for selling pressure to increase over the near-term. If the momentum is strong enough, we could see an eventual break into $51.93 to $49.93.

The shift to concerns over demand could offset the production cuts. If this changes investor sentiment then look for the start of a 2 to 3 week correction.