Oil Markets Balance Fed Fears With Chinese Demand Optimism

April West Texas Intermediate crude oil futures edged lower on Thursday but were then pushed higher on Friday morning by a surprise announcement that Russia would cut production in March.

The catalysts behind the selling pressure on Thursday were an easing of the supply destruction premium after oil infrastructure appeared to have avoided serious damage from the earthquake that devastated parts of Turkey and Syria, growing U.S. Inventories, and worries about Federal Reserve rate hikes.

Nonetheless, the market remained supported by optimism over the expected demand recovery in China.

No Serious Damage to Turkey/Syria Oil Infrastructure

The earthquake, which has killed more than 19,000 people, initially sent oil prices higher on the prospect that the disaster would seriously damage pipelines and other infrastructure and displace crude from the global market for an extended period, according to Reuters.

Additionally, BP Azerbaijan declared force majeure on Azeri crude shipments from the Turkish port of Ceyhan on Tuesday after the quake struck early on Monday. Azeri oil continues to flow there via pipeline, BP Azerbaijan said on Thursday, and Reuters reported.

Potentially Bullish Factors to Watch

April WTI crude oil could be underpinned over the near-term on demand hopes fueled by China’s recovery and a weaker U.S. Dollar.

Powell’s Less-Hawkish Tone Weakens Dollar

WTI crude was supported earlier in the week after Federal Reserve Chair Jerome Powell delivered a less-hawkish message on interest rates than traders had anticipated Tuesday afternoon.

With less aggressive interest rate hikes in the United States, the market is hoping the world’s biggest economy and oil consumer can dodge a sharp slowdown in economic activity or even a recession and avoid a slump in oil demand.

The dollar index is down on Wednesday, extending losses fueled by Powell’s remarks on Tuesday. A weaker greenback tends to drive up foreign demand for dollar-denominated WTI crude oil.

China’s Oil Demand and Increased Producer Input

Oil producers may have to reconsider their output policies following a demand recovery in China, the world’s second-largest oil consumer, the International Energy Agency’s Executive Director Fatih Birol said on Sunday.

Demand in China, the world’s largest crude importer and No. 2 buyer of liquefied natural gas, has become the biggest uncertain factor in global oil and gas markets in 2023 as investors bet on the speed of its recovery after Beijing lifted COVID restrictions.

“We expect about half of the growth in global oil demand this year will come from China,” Birol told Reuters on the sidelines of the India Energy Week conference.

“If demand goes up very strongly, if the Chinese economy rebounds, then there will be a need, in my view, for the OPEC+ countries to look at their (output) policies,” Birol said.

Weekly Technical Analysis

Weekly April WTI Crude Oil

Trend Indicator Analysis             

The main trend is down according to the weekly swing chart.

A move through $82.89 will change the main trend to up. A trade through $70.86 will reaffirm the downtrend.

Retracement Level Analysis

The contract range is $40.67 to $102.99. Its retracement zone at $71.83 to $64.48 is the next major downside target and value zone.

The minor range is $70.86 to $82.89. Its pivot is $76.88.

The short-term range is $88.65 to $70.86. Its pivot is $79.76.

The main range is $102.99 to $70.86. Its retracement zone at $86.93 to $90.72 is a major upside target area.

Weekly Technical Forecast

The direction of the April WTI crude oil market the week-ending February 17 is likely to be determined by trader reaction to the minor pivot at $76.88.

Bullish Scenario

A sustained move over $76.88 will signal the presence of buyers. Overtaking the pivot at $79.76 will indicate the buying is getting stronger. This could lead to a test of the main top at $82.89.

Taking out $82.89 will change the main trend to up. This could create the upside momentum needed to challenge the main retracement zone at $86.93 to $90.72.

Bearish Scenario

A sustained move under $76.88 will indicate the presence of sellers. If this move creates enough downside momentum then look for a test of the support cluster at $71.83 to $70.86.

Short-Term Outlook

Technically speaking, the strong rebound from this week’s early weakness suggests buyers are defending the major retracement zone at $71.83 to $64.48. However, unless April WTI crude oil overcomes the main top at $82.89 then all we can expect is more consolidation as traders try to form a more solid support area.

Major Concerns:  Rising US Commercial Inventories, Entrenched Inflation, Higher Interest Rates

The major concerns that could put a lid on crude oil prices over the near term are rising U.S. commercial inventories, potentially entrenched inflation, and the uncertainty over how long the Fed will raise rates and at what level will they stop increasing rates.

Crude oil stocks in the United States rose last week to their highest level since June 2021, helped by higher production, the Energy Information Administration said. U.S. gasoline stocks also rose the week ending Feb. 3.

Meanwhile, New York Federal Reserve President John Williams came across as hawkish on Wednesday when he said the Fed funds could reach 5.00% - 5.25%. His comments were bearish for commodities and risky assets that were supported the day before by Fed Chair Jerome Powell’s less-hawkish remarks.

Optimism over demand from China may provide some support, but the jump in demand could also keep inflation entrenched, which means rates are going to have to stay higher for longer. This will also raise the chances of a harder-than-expected global recession.

US Consumer Inflation to Have Impact on Prices Next Week

April WTI crude oil is likely to remain supported by the technical retracement zone at $71.83 to $64.48, but it faces a number of potential headwinds. Meanwhile, China’s demand recovery is going to have to continue at a strong pace in order to give the market any chance of a near-term rally.

Looking ahead to next Tuesday, the U.S. reports on consumer inflation. This report is very important because it will have an impact on Federal Reserve policy.

Stronger-than-expected inflation could have a negative impact on crude oil prices because it will mean more rate hikes from the Fed and a stronger U.S. Dollar. A weaker inflation reading could be bullish for WTI prices.