U.S. West Texas Intermediate crude oil futures plunged on Thursday, reaching their lowest point since late March. The move also turned the market lower for the week. Crude oil is also testing an area not visited since the unexpected announcement of an OPEC+ production cut. Essentially, one of the primary drivers of the decline in oil prices is the widespread apprehension surrounding the possibility of an economic recession.
Early in the week as prices fell, some analysts thought the weakness was attributed to the market pricing in the OPEC+ output cuts. However, as the selling pressure intensified following a series of bearish indicators, it became clear that traders were pricing in a possible recession and the prospect of lower demand.
Weakening Economic Activity Points Signals Lower Fuel Demand
According to the latest data, there has been a moderate increase in the number of Americans filing for new claims of unemployment benefits, which may indicate a slowdown in the labor market. The most recent figures from Thursday show that initial claims in the U.S. rose slightly to 245,000, while the previous week was revised to reflect 1,000 more claims than previously reported.
In addition, a separate report from the Philadelphia Fed showed that factory activity in the mid-Atlantic region fell sharply to its lowest level in almost three years in April, with manufacturers in the area expecting activity to remain subdued for the next six months.
The housing…
U.S. West Texas Intermediate crude oil futures plunged on Thursday, reaching their lowest point since late March. The move also turned the market lower for the week. Crude oil is also testing an area not visited since the unexpected announcement of an OPEC+ production cut. Essentially, one of the primary drivers of the decline in oil prices is the widespread apprehension surrounding the possibility of an economic recession.
Early in the week as prices fell, some analysts thought the weakness was attributed to the market pricing in the OPEC+ output cuts. However, as the selling pressure intensified following a series of bearish indicators, it became clear that traders were pricing in a possible recession and the prospect of lower demand.
Weakening Economic Activity Points Signals Lower Fuel Demand
According to the latest data, there has been a moderate increase in the number of Americans filing for new claims of unemployment benefits, which may indicate a slowdown in the labor market. The most recent figures from Thursday show that initial claims in the U.S. rose slightly to 245,000, while the previous week was revised to reflect 1,000 more claims than previously reported.
In addition, a separate report from the Philadelphia Fed showed that factory activity in the mid-Atlantic region fell sharply to its lowest level in almost three years in April, with manufacturers in the area expecting activity to remain subdued for the next six months.
The housing sector in the U.S. is also experiencing similar trends, with existing home sales declining by 2.4% to a seasonally-adjusted annual rate of 4.44 million units last month, after having increased in February for the first time in a year.
These trends are likely related to a year of interest rate hikes by the U.S. Federal Reserve, causing concerns about a decline in fuel demand. U.S. rate futures currently reflect a nearly 90% chance of a 25 basis-point rate increase next month, with a roughly 69% likelihood of a pause in June.
US Gasoline Inventories Rise Unexpectedly, Implied Demand Drops
According to the U.S. Energy Information Administration's report on Wednesday, gasoline inventories unexpectedly rose by 1.3 million barrels to 223.5 million barrels last week, while implied gasoline demand dropped by 3.9% from the same period last year to 8.5 million barrels per day. Although U.S. crude stockpiles fell by 4.6 million barrels, analysts believe this decline could be temporary, as it was due to a spike in crude export activity that may reverse next week.
Russia's Western Oil Ports Set to Reach Highest Loading Levels Since 2019
Sources in the trading and shipping industry indicate that oil loading from Russia's western ports may achieve its highest level since 2019 this April. Furthermore, Pakistan has placed its initial order for discounted Russian crude under a new agreement, which could include up to 100,000 barrels per day, according to the country's petroleum minister.
Crude Prices Affected by Equity Markets after Disappointing Tesla Results
In addition to apprehensions regarding fuel demand, crude prices are also being impacted by the equity markets, which often move in sync with oil prices and were adversely affected by underwhelming results from Tesla and other corporations.
Weekly Technical Analysis
Weekly June WTI Crude Oil
Trend Indicator Analysis
The main trend is up according to the weekly swing chart. However, a new minor top has formed at $83.38. Taking out the nearest main top at $86.40 will reaffirm the uptrend. The main trend will change to down if the selling is strong enough to take out $64.58.
Retracement Level Analysis
The contract range is $37.04 to $100.48. Its retracement zone at $68.76 to $61.27 is the major support. The market is currently trading above this zone after a successful test of $64.58 the week-ending March 24.
The short-term range is $86.40 to $64.58. Its retracement zone at $75.49 to $78.06 is currently being tested. Trader reaction to this area could determine the near-term direction of the market.
The new minor range is $64.58 - $83.38. It 50% level at $73.98 is another potential downside target.
The main range is $100.48 to $64.58. If the uptrend continues then its retracement zone at $85.76 - $89.23 will be the primary upside target.
Weekly Technical Forecast
The direction of the June WTI crude oil market the week-ending April 28 is likely to be determined by trader reaction to the short-term Fibonacci level at $78.06.
Bullish Scenario
A sustained move over $78.06 will signal the presence of buyers. Overtaking $83.38 will indicate the buying is getting stronger with the next target the resistance cluster at $85.76 - $86.40.
Bearish Scenario
A sustained move under $78.06 will indicate the presence of sellers. This could trigger a quick break into the short-term 50% level at $75.49, followed closely by a minor pivot at $73.98. Buyers could come in on the first test of the $75.49 - $73.98 support cluster. If it fails then look for a potential acceleration to the downside.
Short-Term Outlook
The short-term outlook for crude oil prices is bearish due to concerns over a possible recession and lower fuel demand. Weak economic indicators, such as an increase in Americans filing for new unemployment claims and a decline in factory activity and housing sales, suggest a slowdown in the labor market and the overall economy.
Furthermore, gasoline inventories rose unexpectedly while implied gasoline demand dropped, which could further pressure crude oil prices.
On the supply side, Russia's western oil ports are expected to reach their highest loading levels since 2019, and Pakistan has placed its first order for discounted Russian crude. However, the impact of these developments is likely to be overshadowed by concerns about weakening demand.
Finally, crude oil prices are also affected by equity markets after disappointing results from Tesla and other corporations. Therefore, in the short term, crude oil prices may continue to decline.
Technically speaking, trader reaction to the retracement zone at $75.49 - $78.06 is likely to set the tone of the market next week. Generally speaking, look for the downside bias to extend under $75.49, and for the upside bias to re-develop on a sustained move over $78.06.