Oil Prices Rise As Traders Brush Off OPEC Demand Warnings

Crude oil closed lower on Thursday after an OPEC report raised concerns about summer demand, encouraging traders to book profits after the market failed to follow through to the upside following Wednesday’s big gain.

US benchmark West Texas Intermediate futures gained 2% on Wednesday, while testing its highest level in more than a month. This move was fueled by cooling US inflation that raised hopes that the US Federal Reserve will stop raising interest rates. The upside momentum came to an abrupt halt, however, when OPEC flagged downside risks to summer oil demand in a monthly report.

Despite Thursday's declines, the OPEC+ decision to trim production has pushed WTI futures up nearly 8% so far this month, and it continues to raise expectations of potential future tightness in the oil markets.

Signs of demand recovery in China, the top importer of crude oil and products, provided more support for oil prices. Additionally, although crude inventories rose, traders shrugged off the small build in US crude oil stocks.

OPEC Warns of Downside Risks to Summer Oil Demand

OPEC has warned of downside risks to summer oil demand due to rising inventories and global economic challenges, in the backdrop of output cuts announced earlier this month by OPEC+ producers that have led to a rise in oil prices.

OPEC maintained its forecast that oil demand will rise in 2023, despite the monthly oil report citing high inflation, monetary tightening, stability of financial markets, and high sovereign, corporate and private debt levels as potential challenges to global economic development.

OPEC's oil production fell in March, reflecting the impact of earlier output cuts pledged by OPEC+ to support the market and some unplanned outages.

The April 2nd voluntary cuts bring the total curbs pledged by OPEC+ to 3.66 million bpd, equal to 3.7% of global demand. Brent crude remains above $80 a barrel, indicating that the market remains bullish despite the warnings.

US Crude Inventories Rise Unexpectedly

US crude inventories unexpectedly rose last week, according to the Energy Information Administration.

Crude inventories increased by 597,000 barrels to 470.5 million barrels, versus an expected 600,000 barrel drop.

The rise was attributed to the release of oil from the US Strategic Petroleum Reserve and weak export levels. The Strategic Petroleum Reserve sold 26 million barrels as part of a congressionally mandated sale.

Exports of crude oil fell 2.5 million barrels per day to 2.7 million bpd, the largest drop on record. However, gasoline and distillate inventories fell less than expected.

US Producer Prices Fall, Adding Pressure on Fed to Pause Interest Rate Hikes

The March producer prices index fell by 0.5% month over month, compared to expectations of no change, while the core wholesale prices reading, which excludes food and energy, dropped 0.1% month over month, beating the 0.2% increase forecasted by economists.

The data follows the release of the consumer price index, which also suggested that inflationary pressures may be easing.

The figures may affect the US Federal Reserve's policy decisions, with the central bank having previously indicated that interest rate hikes could be paused soon. While investors are anticipating a 25 basis point rate hike at the conclusion of the Fed's May meeting, the latest data could change this outlook.

The news is potentially bearish for the greenback, which would be supportive for dollar-denominated crude oil

Weekly Technical Analysis

Weekly June WTI Crude Oil

Trend Indicator Analysis             

The main trend is up according to the weekly swing chart. The trend changed to up the previous week when buyers took out the main top at $80.97. Taking out $82.98 earlier this week reaffirmed the uptrend. The main trend will change to down on a trade through $64.58.

Retracement Level Analysis

The contract range is $37.04 to $100.48. Its retracement zone at $68.76 to $61.27. The market is currently trading above this zone after a successful test of $64.58 the week-ending March 24, making it support.

The short-term range is $86.40 to $64.58. Its retracement zone at $75.49 to $78.06 is new support.

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 21 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. This could create the upside momentum needed to challenge the major retracement zone at $85.76 - $89.23.

Overtaking $82.98 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. Buyers could come in on the first test of this level. If it fails then look for a potential acceleration to the downside.

Short-Term Outlook

Given the potentially bearish OPEC news released on Thursday, we could see more frequent profit-taking as the June WTI futures contract approaches the key 50% level at $85.76. Overtaking this level will put the market in a position to extend the rally into the key Fibonacci level at $89.23. Once again, watch for sellers. However, overtaking this level could trigger an acceleration to the upside.

If aggressive counter-trend sellers do gain control of the market then they are likely to try to drive the market toward the major support area at $78.06 - $75.49. This area must hold or prices could collapse toward $68.75.

We could see a rangebound trade over the near-term with a bias to the upside as long as the hedge funds remain bullish.

Our wildcard is the U.S. Dollar. It could continue to plunge if investors start to price in a pause in interest rate hikes by the Fed after a small rate hike at its May 3 meeting. This would be potentially bullish for dollar-based crude oil.

Technically speaking, we still believe there is enough upside momentum in the market to take it to $85.76 - $89.23 over the near-term.