Geopolitical Risk Keeps Oil Markets on Edge

March West Texas Intermediate (WTI) crude oil futures have been oscillating within a narrow $8.00 range, displaying resilience in the face of various market forces. Despite this confinement, the market has managed to register a small gain for the week.

In the short term, traders will keep a close watch on the array of elements shaping the oil market, such as evolving tensions in the Middle East, fluctuations in U.S. production, and shifts in global demand. These factors are crucial for understanding both the present situation and future trends in the oil market.

Middle East Tensions

Recent geopolitical developments in the Middle East, particularly Pakistan's strikes inside Iran and reciprocal Iranian actions, have heightened tensions, raising concerns over the security of oil tankers in the Red Sea. While these events have yet to significantly disrupt global oil supplies, they have led to increased shipping costs due to higher freight and insurance rates. The resumption of tanker routes through the Bab al-Mandab Strait signals a cautious normalization in the region, yet the situation remains volatile.

US Production

The U.S. oil industry has been grappling with production challenges, notably in North Dakota, where severe cold weather has led to significant output reductions. The Energy Information Administration (EIA) reported that overall U.S. production reached a new high of 13.3 million barrels per day. However, the extreme weather in North Dakota has resulted in a considerable drop in the state's production, highlighting the variable nature of U.S. oil supply.

EIA

The EIA reported a larger-than-expected decrease in U.S. crude inventories, indicating robust refinery demand. This reduction in stockpiles, coupled with increased refinery activity, points to a strong domestic demand for oil. Concurrently, the rise in gasoline and distillate inventories to multi-year highs suggests a potential surplus in the fuel market, presenting a mixed outlook for the U.S. oil sector.

OPEC

OPEC maintained an optimistic forecast for global oil demand growth, expecting a substantial increase over the next few years. This projection stands in contrast to views from organizations like the International Energy Agency (IEA), which predict a peak in oil demand by 2030 due to shifts towards renewable energy. OPEC's forecast, particularly highlighting demand from China and the Middle East, underscores differing opinions on the long-term global oil consumption trend.

IEA

The IEA offered a more tempered prediction for oil demand growth, anticipating a slower rate of increase. This conservative outlook is influenced by factors such as economic performance in major economies, advancements in energy efficiency, and the expanding electric vehicle market. These elements suggest a moderated future demand for oil.

China

China's role in the global oil market is pivotal, with its economic growth directly impacting energy demand. The country's slower economic expansion has sparked concerns about its future oil consumption. However, the proactive stance of Chinese refiners, who are securing crude oil at current prices, indicates an expectation of stronger demand later in 2024. This approach by Chinese refiners points to a cautiously optimistic view of China's oil demand in the near future.

Fed, Interest Rates, US Dollar

The interplay between the U.S. dollar value, Federal Reserve policies, and oil prices is a crucial aspect of the market. A stronger dollar has made oil pricier for non-dollar users, potentially suppressing demand. Additionally, the Federal Reserve's interest rate decisions are being closely watched, as they have significant implications for the oil market.

Weekly Technical Analysis

Weekly March WTI Crude Oil

Trend Indicator Analysis

The main trend is down according to the weekly swing chart. The main trend turned down the week-ending November 10th when sellers took out the last main bottom at $76.10

One potential downside target is the main bottom at $63.00. Taking out this level will reaffirm the downtrend. The trend will change to up on a move through $86.68. A trade through $90.14 will reaffirm the uptrend.

The minor trend is also down. A trade through $76.31 will change the minor trend to up. This will also shift momentum to the upside.

Retracement Level Analysis

The contract range is $38.76 to $90.14. Its retracement zone at $64.52 to $58.46 is the major support zone. This area stopped the selling the week-ending March 24, 2023 at $63.92 and the week-ending May 5, 2023 at $63.00. This is a major long-term value zone.

The intermediate range is $41.52 to $90.14. Its retracement zone at $65.83 to $60.09 is additional support. A second intermediate range is $58.99 to $90.14. Its retracement zone is $74.57 to $70.89.

The minor range is $90.14 to $63.00. Its retracement zone at $76.57 to $79.77 is the next potential upside target area.

The closeness of these retracement zones is helping to generate the choppy, rangebound trade.

Closing Price Reversal Bottom Chart Pattern

Following the prolonged move down in terms of price and time, March WTI crude oil posted a closing price reversal bottom on the weekly chart during the week-ending December 15. The market is still respecting this chart pattern which is helping to underpin prices.

The market is now consolidating between $68.28 and $76.31 as traders assess the current fundamental situation before making their decision to either buy strength or sell weakness.

Weekly Technical Forecast

The direction of the March WTI crude oil market the week-ending January 26 is likely to be determined by trader reaction to $74.57 and $70.89. If it can’t sustain a rally or a break then expect more sideways trading.

Bullish Scenario

A sustained move over $74.57 will signal the presence of strong counter-trend buyers. If this creates enough near-term momentum then look for the counter-trend rally to continue with $76.57 to $79.77 a potential upside target.

Bearish Scenario

A sustained move under $70.89 will indicate the presence of strong sellers. This could create the downside momentum needed to challenge the 50% levels at $65.83 and $64.52, and the main bottom at $63.00.

Short-Term Forecast

In the upcoming week, the oil market is poised for potential volatility due to a series of impactful factors:

Middle East Tensions: Escalating tensions in the Middle East, particularly between Pakistan and Iran, could heighten concerns over the safety of oil tankers in key transit points like the Red Sea. Any disruption in these routes may lead to fluctuations in global supply, potentially pushing prices upward.

US Production Changes: The variable oil production in the United States, especially with the recent output reductions in North Dakota due to severe weather, may contribute to supply-side uncertainty. This could lead to price instability, depending on the duration and severity of production disruptions.

Global Demand Shifts: The dynamic of global oil demand, especially with the cautious outlook from China due to its economic slowdown, will be crucial. If Chinese demand rebounds later in the year as anticipated by their refiners' current purchasing trends, it could provide upward momentum to prices.

Economic and Policy Factors: The Federal Reserve's interest rate decisions and the strength of the U.S. dollar will be significant. A stronger dollar could dampen oil demand by making it more expensive for non-dollar users, while any unexpected moves by the Fed could introduce further price volatility.

Overall, traders are likely to experience a market sensitive to geopolitical events, weather-related production changes, and major economic policy decisions, all of which could sway oil prices in the short run.

The technical picture suggests a rangebound trade is likely, but the charts are pointing out a potential upside breakout level that could trigger a strong countertrend rally as well as a potential trigger point for an acceleration to the downside.