Mixed Signals Spark Volatility in Oil Markets Ahead of Key Events

Oil Market Weekly Recap and Next Week's Outlook

This week, oil prices experienced volatility driven by mixed signals from U.S. fuel demand data, expectations surrounding the OPEC+ meeting, and macroeconomic factors influencing investor sentiment. As the market prepares for crucial developments in the coming days, traders remain cautious yet optimistic about potential price movements.

U.S. Fuel Demand and Inventory Reports

Oil prices declined for the second consecutive session on Thursday due to weak U.S. fuel demand and unexpected increases in gasoline and distillate inventories. Despite a larger-than-expected drop in U.S. crude stocks, the rise in refined product inventories suggested weaker demand. The U.S. Energy Information Administration (EIA) reported a decline in gasoline demand, countering expectations of a surge due to the Memorial Day holiday, marking the start of the U.S. summer driving season. Lower gasoline demand amid high refinery output led to a build in inventories, putting downward pressure on prices.

Impact of Interest Rates on Oil Prices

Persistent concerns over high U.S. interest rates have also pressured oil prices. Higher borrowing costs can slow economic activity, reducing oil demand as industries and consumers cut back on fuel usage. Last week's risk-off sentiment contributed to a weekly decline in crude prices. Market participants are closely watching the latest PCE inflation report on Friday, which could signal further monetary tightening. Continued high rates could dampen economic growth, leading to lower energy consumption and impacting crude prices negatively.

OPEC+ Meeting Expectations

The upcoming OPEC+ meeting on June 2 is a focal point for traders. The group, including OPEC members and allies like Russia, is anticipated to extend its current supply cuts. This decision aims to stabilize the market amid rising global oil inventories and subdued demand. Holding the meeting online rather than in person suggests a continuation of existing policies without major changes. Extending production cuts would help counteract high U.S. output and support prices by reducing the global supply.

Market Sentiment and Global Factors

Traders are also monitoring global economic indicators and geopolitical developments. The resilience of U.S. economic activity, indicated by robust mobility data and strong air travel, contrasts with the pressure from high interest rates. Saudi Arabia's potential price adjustments for crude oil exports to Asia could influence market dynamics. A decrease in the official selling price for Arab Light crude may signal weaker demand or increased supply, impacting prices in the Asian market. Additionally, rising global oil inventories through April due to subdued fuel demand may strengthen the case for OPEC+ to maintain supply cuts.

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 has been tested three out of four weeks and so far is representing support very well. It is essentially controlling the near-term direction of the market, offering hope for the bulls and a potential trigger point for a steep decline for the bears.

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 June 7 is likely to be determined by trader reaction to $76.91.

Bullish Scenario

A sustained move over $76.91 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 $76.91 will indicate the presence of sellers. This could drive prices into Fibonacci support at $74.49. Bullish traders are likely to read a break back into this price as a buying opportunity since it represents value 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.

Market Forecast

Given the expected extension of OPEC+ supply cuts and strong U.S. summer fuel demand, the short-term outlook for oil prices is bullish. Production curbs are likely to support prices by tightening the market supply. However, high interest rates and potential price adjustments by key producers like Saudi Arabia pose risks. Traders should monitor OPEC+ decisions and U.S. inflation data closely, as these factors will significantly influence oil price trends in the coming week.

While the continuation of OPEC+ supply cuts could put a floor in the market, strong signs of demand will be needed to drive prices higher. We can see this on the weekly chart where a floor may be forming at $76.91 to $74.49. However, the market needs a catalyst to drive prices into the near-term pivot at $82.01.