Oil Prices Are Increasingly Influenced By U.S. Economic Data

U.S. West Texas Intermediate crude oil futures finished lower on Thursday after giving up earlier gains.

Helping to put a lid on prices was a rise in the U.S. Dollar, which strengthened after fresh economic reports suggested the Federal Reserve would have to raise rates for longer than previously anticipated.

Sellers may have also been influenced by a massive build in U.S. crude oil stockpiles reported on Wednesday although prospects for a Chinese demand recovery likely offset this news.

Traders Tracking U.S. Economic Reports Closely

The price swings in the market this week strongly suggest that the crude oil market has become data dependent. Not just the traditional supply/demand numbers but also U.S. economic data that has a strong influence on Fed policy.

Throughout the week, including Thursday's stronger-than-expected producer price index (PPI) report, hot economic data has been signaling to traders that the Federal Reserve has to continue to raise interest rates or risk losing control over inflation.

This is driving up Treasury yields, while boosting the U.S. Dollar. Since crude oil is a dollar-denominated asset, foreign demand for the asset tends to weaken.

In addition to the strong economic news, a gauge of manufacturing in the mid-Atlantic region unexpectedly plunged. This led to increased worries about a recession, which would also put a dent in demand.

Stubborn Consumer Inflation and Hawkish Fed Speakers Raise Concerns Over Possible Recession

An acceleration in U.S. consumer prices in January and hawkish comments from Fed speakers warning that the U.S. central bank will need to keep raising interest rates to beat inflation also weighed on crude oil prices this week.

Crude oil prices are being pressured by the belief that the higher interest rates rise in the U.S., the closer the economy moves toward a recession and lower fuel demand.

The Fed Funds rate is now expected to rise to at least 5.2% by June or July, much higher than previously anticipated.

Russia to Slash Production

Russia, the world's third-largest oil producer, said it would cut crude production in March by 500,000 barrels per day (bpd), or about 5% of output, according to Reuters. The move is being called a retaliation against western curbs on its exports that were imposed in response to the Ukraine conflict.

If you do the math, the 500,000 bpd cut would bring Russia back in line with its OPEC+ quota as Moscow is currently over-exporting. This is potentially bullish when combined with the China demand recovery.

US to Release More Strategic Petroleum Reserve Crude Oil

Prices are also being pressured by an announcement that the U.S. Department of Energy (DOE) would sell 26 million barrels of oil from the nation's Strategic Petroleum Reserve (SPR), which is already at its lowest level in roughly four decades. This is a potentially bearish short-term event.

SPR inventory is currently sitting at its lowest level since December 1983.

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 24 is likely to be determined by trader reaction to the minor pivot at $76.88 and the minor pivot at $79.76. Staying inside this range will lead to a sideways trade.

Bullish Scenario

A sustained move over $79.76 will signal the presence of buyers. 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

Over the long term, WTI oil prices are expected to be supported by speculators betting on China's demand recovery and limited supply growth due to a lack of investment. This assessment is being supported by OPEC country officials, according to Reuters.

However, over the near term, the rally is going to go through a series of stops and starts due to uncertainty over Fed interest rate hikes. The central bank is nearing the end of its interest rate hiking cycle, but traders are now pricing in potential rate hikes out to June. This may not change the trend to down, but it could produce headwinds, which limit the markets' upside potential.

Prices could also remain under pressure until demand shows up. Bullish traders are waiting for the recovery in China to start bearing some fruit. But now demand in the U.S. is raising concerns. Meanwhile, OPEC drew some support after raising its 2023 global oil demand growth forecast. However, that report is counting on a jump in demand from China. And it's a longer-term outlook.

Essentially, any bullish news about China's demand recovery will be supportive. Any strong economic reports that highlight the need for more Fed rate hikes, drive the U.S. Dollar higher, or push the economy closer to a recession will be bearish for crude oil prices.