Oil Gains Momentum As Chinese Demand Climbs

March West Texas Intermediate crude oil posted its highest close since Dec. 1 on Thursday on hopes of increased Chinese demand. Surprisingly, traders shrugged off a second straight week of large builds in U.S. crude inventories and fear that the Federal Reserve will push the U.S. economy into recession if it continues to raise interest rates aggressively.

New Reports Put Increased Chinese Demand in Spotlight

Crude oil futures were drifting lower early Thursday on recession fears but quickly rebounded after the latest export figures published by the Joint Organizations Data Initiative showed Chinese oil demand climbed by nearly 1 million barrels per day (bpd) from the previous month to 15.41 bpd in November, the highest level since February.

The market extended its gains after International Energy Agency (IEA) head Fatih Birol said on Thursday that energy markets could be tighter in 2023, especially if the Chinese economy rebounds and the Russian oil industry struggles under sanctions.

Earlier in the week on Tuesday, OPEC said Chinese oil demand would rebound this year due to the relaxation of the country's COVID-19 curbs and drive global growth, and it sounded an optimistic note on the prospects for the world economy in 2023.

US Crude Stockpiles Post Surprise Large Build

U.S. crude oil stockpiles last week posted a large build that took analysts by surprise, as inventories in the Cushing, Oklahoma, storage hub gained while the market continued to recover from a winter storm last month, data from the Energy Information Administration showed on Thursday.

Crude inventories rose by 8.4 million in the week to Jan. 13 to about 448 million, their highest since June 2021, EIA data showed. Analysts in a Reuters poll had expected a 593,000-barrel drop.

Crude stocks at the Cushing, Oklahoma, delivery hub rose by 3.6 million barrels to 31.4 million, the highest since January 2022, the data showed.

Gasoline stocks rose by about 3.5 million barrels in the week, the EIA said, compared with analysts' expectations for a 2.5 million-barrel gain.

Distillate stockpiles, which include diesel and heating oil, fell by 1.9 million barrels in the week, versus expectations for a 122,000-barrel build, the data showed.

Recession Fears May Offset Optimistic Outlook for Renewed China Demand

Fears of a recession in the United States were heightened on Wednesday following the release of disappointing U.S. retail sales and industrial production data. A bigger-than-expected drop in U.S. producer inflation also weighed on sentiment.

The reports have crude oil traders questioning whether the Fed may have gone too far with its rate hikes and that expectations of a "soft-landing" in the economy have been taken off the table. Some traders may be pricing in the impact of a full recession on crude oil demand.

Fed May Have Gone Too Far with Rate Hikes

Investors have been parsing through recent U.S. economic data and Fed policymaker remarks for clues as to how high rates will go. But, while recent figures point to easing inflation, it looks as if the Fed's terminal rate will top 5%. This could easily trigger a recession that doesn't end with a "soft-landing". This would also put a serious dent into U.S. and worldwide demand.

Weekly Technical Analysis

Weekly March WTI Crude Oil

Trend Indicator Analysis             

The main trend is down according to the weekly swing chart. However, momentum is trending higher.

A move through $91.44 will change the main trend to up. A trade through $61.25 will reaffirm the downtrend.

The minor trend is up. It turned higher earlier in the week when buyers took out $81.62. The move shifted momentum to the upside.

Retracement Level Analysis

The contract range is $40.25 to $104.90. Its retracement zone at $72.58 to $64.95 is the next major downside target and value zone.

The main range is $61.25 to $104.90. The market is currently trading inside its retracement zone at $83.08 to $77.92.

The short-term range is $104.90 to $70.56. Its retracement zone at $87.73 to $91.78 is a major upside target area.

Weekly Technical Forecast

The direction of the March WTI crude oil market for the week-ending January 27 is likely to be determined by trader reaction to the main 50% level at $83.05.

Bullish Scenario

A sustained move over $83.08 will signal the presence of buyers.  If this move creates enough upside momentum then look for a surge into the short-term retracement zone at $87.73 to $91.78.

Bearish Scenario

A sustained move under $83.08 will indicate the presence of sellers. If this move creates enough downside momentum then look for a test of $77.92. If this level fails then look for the selling to possibly extend into $72.58.

Short-Term Outlook

Oil prices have been caught in a tug-of-war between fears of a possible U.S. recession and optimism over China's demand outlook.

Of course, what happens to the U.S. economy will also hit China's economy hard. So a U.S. recession could be devastating to China especially since the country is still trying to emerge from three years of excessive COVID-19 restrictions.

That being said, it's difficult at this time to forecast China's demand. Opening up the economy will be one way to solve the global demand issue, but those gains could be limited if there is a global recession.

Prices could remain rangebound over the next 3 to 6 months if analysts can't get a firm grip on future demand, especially from China.

However, this week's price action suggests oil traders may still be leaning toward a "soft-landing" recession in the U.S. that can be easily overcome by a jump in China demand.

Although momentum has shifted to the upside on the weekly chart, there is still a way to go before the trend changes to up. We're not expecting to see a change in trend until traders can determine the Fed's end game.