Fundamental Forces Clash In Turbulent Oil Market

U.S. West Texas Intermediate crude oil futures are trading slightly higher on Friday but are still in a position to post its first weekly loss in three weeks as mixed fundamentals continue to control the price action.

Bullish traders are pinning their hopes for higher prices on dwindling fuel supplies for Russia, while bearish traders are betting aggressive central bank interest rate hikes to combat out of control inflation and China’s COVID lockdowns will slow global growth and demand.

Meanwhile, an International Energy Agency (IEA) report on Thursday highlighted the dueling factors in the market, saying rising oil production in the Middle East and the United States and a slowdown in demand growth are “expected to fend off an acute supply deficit amid a worsening Russian supply disruption.”

Additionally, while most of the focus this week was on the European Union’s haggling over an embargo on Russian oil, the latest figures on U.S. inventories underscored the dynamics pushing prices higher.

Factors Affecting Supply

EIA Trims US Crude Production Forecasts

On the supply side, the EIA trimmed its U.S. crude production forecasts for 2022 and 2023. It now expects output in 2022 to average 11.9 million barrels per day (bpd) compared with its previous estimate of 12 bpd.

U.S. crude output is expected to rise 940,000 bpd to 12.85 million bpd in 2023, according to the same monthly report from the EIA. U.S. total petroleum consumption is due to rise 730,000 bpd to 20.51 million bpd in 2022.

US Crude Stocks Surge on Big Release from Strategic Reserves – EIA

U.S. commercial crude stocks rose last week due to a record release of oil from U.S. strategic reserves, but that could not prevent another drawdown of gasoline supply headed into driving season, the Energy Information Administration said on Wednesday.

Crude inventories rose by 8.5 million barrels in the week to May 6 to 424.2 million barrels, compared with analysts’ expectations in a Reuters poll for a decline of 457,000.

The increase in crude inventories was due to a combination of the 7-million barrel release from the U.S. Strategic Petroleum Reserve and a dip in exports. The release from the SPR was ordered by President Biden weeks ago with the intention of lowering gasoline prices.

The dip in exports was likely caused by lower foreign demand due to the strong U.S. Dollar. The greenback rose to a 20-year high against a basket of major currencies last week, likely dampening demand for the dollar-denominated commodity.

In other news, crude stocks at the Cushing, Oklahoma, delivery hub fell by 587,000 barrels in the last week, EIA said. The EIA also reported net U.S. crude imports rose last week by 632,000 barrels per day, EIA said.

High Demand Leading to Drawdown in Products

Refinery crude runs rose by 230,000 barrels per day in the last week, EIA said, while refinery utilization rates rose by 1.6 percentage points. Overall utilization now sits at 90%, but analysts noted several U.S. facilities have closed in the last couple of years.

The refineries still online are scrambling to meet high demand, leading to drawdowns in energy products. Gasoline stocks declined 3.6-million barrels the week-ending May 6. This dropped inventory to 225 million barrels. This is not good considering the U.S. is on the cusp of driving season.

Distillate stockpiles, which include diesel and heating oil, fell by 913,000 barrels in the week to 104 million barrels, and now sit at their lowest since 2005. East Coast stockpiles again fell to an all-time low.

Weekly Technical Analysis

Weekly July WTI Crude Oil

Trend Indicator Analysis         

The main trend is up according to the weekly swing chart. A trade through $116.43 will signal a resumption of the uptrend. A move through $61.32 will change the main trend to down. This is highly unlikely, however.

The minor trend is also up. A move through the minor tops at $109.77 and $110.07 will reaffirm the uptrend. A trade through $94.47 will change the minor trend to down. This will shift momentum to the downside.

Retracement Level Analysis

The first minor range is $116.43 to $88.53. The market is currently trading on the strong side of its retracement zone at $105.77 to $102.48, making it support.  

The second minor range is $88.53 to $110.07. Its retracement zone at $99.30 to $96.76 is additional support.

If $96.76 fails as support then we could see an acceleration to the downside with the retracement zone at $88.88 to $82.37 the next target.

The main range is $34.55 to $116.43. If $82.37 fails as support then look for the selling to extend into its retracement zone at $75.49 to $65.83.

Weekly Technical Forecast

The direction of the June WTI crude oil market the week-ending May 20 will be determined by trader reaction to $105.77.

Bullish Scenario

A sustained move over $105.77 will indicate the presence of buyers. If this move creates enough upside momentum then look for a retest of the minor top at $110.07. This is a potential trigger point for an acceleration into the contract high at $116.43.

Bearish Scenario

A sustained move under $105.77 will signal the presence of sellers. If this move creates enough downside momentum then look for a quick test of the 50% level at $102.48, followed by another retracement zone at $99.30 to $96.76.

A failure to hold $96.76 will indicate the selling pressure is getting stronger. This could trigger a break into a support cluster at $94.47, $92.15 and $88.53.

Taking out the minor bottom at $88.53 could trigger an acceleration into the Fibonacci level at $82.37.  

Short-Term Outlook

The market has been spiraling for over two-months, creating a chart pattern that tends to lead to heightened volatility.

With the market threatening the upper area of its two-month range, it looks as if traders are going to attempt to breakout above the two tops at $109.77 and $110.07. If this move takes place, it would suggest that traders favor the supply problems over the demand issues.

Additionally, the mammoth transfers from the SPR into commercial inventories can’t be ignored, but the market seems to be getting used to it. The move may have helped put a lid on prices, but it hasn’t really met its initial expectations.

Crude oil prices are still relatively high and gasoline prices are getting ready to breakout to the upside. This could be the catalyst that finally helps crude oil breakout of its tight trading range.

Gasoline inventories are sending out a danger signal shortly before the start of the U.S. driving season. This makes $5 gasoline a real target. Furthermore, it’s not going to help the U.S. inflation problem.

In summary, worries about supply and a favorable chart pattern suggest bullish traders are going to try to drive the market through $110.07 and into at least $116.43 over the short-term.