Oil Prices Move Higher After a Volatile Week

June West Texas Intermediate (WTI) crude oil futures have experienced significant volatility this week, ultimately poised to close higher following a late-week recovery. This recovery was significantly influenced by positive economic remarks from U.S. Treasury Secretary Janet Yellen, which countered earlier market fears driven by economic data and geopolitical developments.

Economic Weakness and Market Sentiments

Throughout the week, oil markets were beleaguered by concerns over a slowing economy exacerbated by persistently high interest rates. The release of the U.S. GDP data, which showed growth at only 1.6% against the expected 2.4%, furthered these fears by suggesting a more considerable economic slowdown. This report was particularly impactful, fueling bearish sentiment as traders worried about falling demand in a weakening economy. Additionally, a stronger U.S. dollar made dollar-priced oil more expensive for holders of other currencies, dampening demand prospects.

Supply Concerns and Inventory Data

Adding another layer to the market's complexity this week was the Energy Information Administration (EIA) report, which revealed a surprising drop in U.S. crude inventories. Stocks plummeted by 6.4 million barrels, significantly surpassing the expected increase of 825,000 barrels. This drawdown is a bullish signal, often indicative of higher-than-expected demand or lower supply, and provided some support to oil prices amidst broader economic concerns.

Investor Behavior and Fund Management

Investor sentiment and behavior, particularly from hedge funds and other money managers, significantly influenced the oil market trends. Over the past week, there was a notable shift in positions, as evidenced by movements in futures and options contracts. Fund managers increased their net long positions in Brent crude, indicating a bullish outlook on potential supply disruptions due to Middle Eastern tensions. However, the sentiment was not uniformly bullish across all petroleum markets. There was a significant sale of positions in WTI, gasoline, diesel, and European gas oil, reflecting broader uncertainties and a lack of conviction about the sustainability of higher oil prices. This mixed trading activity underscores the market’s sensitivity to both immediate data and broader economic indicators.

Geopolitical Developments

Geopolitical tensions initially escalated with increased military actions in the Middle East, specifically Israel's airstrikes in Gaza. Such conflicts typically introduce a risk premium to oil prices due to potential supply disruptions. However, as the week progressed, tensions appeared to ease somewhat, and the immediate threat to oil supplies diminished, removing some of the earlier risk premium and exerting downward pressure on prices.

Reversal Triggered by Yellen’s Comments

The turning point in the week's trading came following Secretary Yellen’s optimistic comments regarding the U.S. economy. Her assertion that the first quarter's GDP growth could be revised upwards and her downplaying of inflation concerns contrasted sharply with the prevailing market pessimism. These comments reversed the bearish sentiment, as traders reassessed the economic landscape and anticipated stronger future demand, leading to a rally in oil prices.

Weekly Technical Analysis

Weekly June WTI Crude Oil

Trend Indicator Analysis

The main trend is up, but momentum has shifted to the downside, following last week’s confirmation of the previous week’s closing price reversal top.

This chart pattern tends to last 2 to 3 weeks. It’s 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 $78.22 to $78.03 on the radar.

Retracement Level Analysis

The contract range is $39.16 to $88.15. Its retracement zone at $63.66 to $57.87 is the major support zone. This area stopped the selling the week-ending May 5, 2023 at $65.65. This is a major long-term value zone.

The intermediate range is $62.65 to $86.97. Its retracement zone at $74.81 to $71.94 is support.

The minor range is $69.08 to $86.97. Its retracement zone at $78.03 to $75.91 is another value zone.

Weekly Technical Forecast

The direction of the June WTI crude oil market the week-ending May 3 is likely to be determined by trader reaction to a minor pivot at $83.84.

Bullish Scenario

A sustained move over $83.84 will signal the presence of strong buyers. If this creates enough near-term momentum then we could see an acceleration to the upside with the main tops at $86.97 and $88.15 the next targets. The latter is a potential trigger point for an acceleration to the upside that could put $100 a barrel on the radar.  

Bearish Scenario

A sustained move under $83.83 will indicate the presence of sellers. This could drive the market into the short-term retracement zone at $78.03 to $75.91. Holding this area could create a rangebound trade. Bullish traders are likely to read a break back into this area as a buying opportunity since it is also a value zone.

Short-Term Market Forecast

Looking forward, the market outlook for next week appears cautiously optimistic but complex. The potential for GDP figure revisions upwards could bolster market confidence, further supported by the significant inventory drawdown indicating robust demand. However, the mixed sentiment among fund managers and the ongoing geopolitical risks could inject volatility. Assuming no major negative developments, the market might lean towards a bullish trend, buoyed by positive economic adjustments and tight supply conditions.

In conclusion, while the market has navigated through significant challenges from economic anxieties and fluctuating geopolitical risks, the direction ahead seems tentatively positive. This outlook is predicated on sustained economic optimism as indicated by Yellen and reinforced by inventory data, despite the cautious stance among some investors reflected in the diverse trading strategies seen this week.

Technically, the worst of the selling may be over, following the closing price reversal top at $86.97 the week-ending April 12. Although the market didn’t come close to hitting the target at $78.03 to $75.91, this week’s price action suggests the presence of strong buyers and weak shorts. This suggests that the recent sell-off was likely fueled by profit-taking rather than fresh short-selling. Essentially, it all comes down to trader reaction to the minor weekly pivot at $83.84.