Oil Prices Under Pressure But Bullish Catalysts Loom

December WTI crude oil futures are edging higher late Thursday, but struggling to turn higher for the week. The price action has been volatile throughout the week especially today when traders were asked to deal with an aggressive Federal Reserve rate hike from the previous day, a wicked trade in the U.S. Dollar due to a Bank of Japan intervention, and a smaller than expected rate hike by the Bank of England.

When the dust finally began to clear, the prospect of higher Chinese demand and geopolitical risks fueled by an escalation of the war in Ukraine, proved to be strong bullish catalysts.

China Crude Demand is Rebounding after Lifting of Strict COVID-19 Restrictions

At least three Chinese state oil refineries and a privately run mega refiner are considering increasing runs by up to 10% in October from September, eyeing stronger demand and a possible surge in fourth-quarter fuel exports, people with knowledge of the matter said, Reuters reported.

Chinese refiners are expecting Beijing to release up to 15 million tonnes worth of oil products export quotas for the rest of the year to support the no. 2 economy's sagging exports. Such a move would signal a reversal in China's oil products export policy, add to global supplies and depress fuel prices, according to Reuters.

Traders Eyeing Supply Disruptions as Russia Begins Massive War Call-Up

Oil prices are being underpinned on Thursday after Russia pushed ahead with its biggest military mobilization since World War Two.

President Vladimir Putin's order to mobilize another 300,000 Russians to fight escalates a war that has already killed thousands, displaced millions, pulverized cities, damaged the global economy and revived Cold War confrontation, according to Reuters.

Putin's move has driven some weak shorts out of crude oil, while drawing the attention of just enough bullish speculators to provide support.

There hasn't been a rally per se because so far the event hasn't led to a supply disruption. Bullish traders are betting global leaders will get together to form some kind of agreement that will once again limit the amount of Russian oil hitting the open market. Any agreements that leads to a disruption in supply could trigger the start of a strong rally.

One such factor that could launch a rally is a price cap. According to Reuters, the European Union is considering an oil price cap, tighter curbs on high-tech exports to Russia and more sanctions against individuals, diplomats said, responding to what the West condemned as an escalation in Moscow's war in Ukraine.

OPEC+ Production Miss Highlights Tight Supply Situation

OPEC+ fell short of its oil production target by 3.583 million barrels per day (bpd) in August, and internal document showed, having missed its target by 2.892 bpd in July, Reuters reported. Early in the week, prices jumped on the news since it represented a sign of underlying tight supply.

In related news, the impasse over a revival of the Iran nuclear deal is also continuing to keep that country's exports from fully returning to the market. Look for crude oil prices to retreat if the deal goes through.

When crude oil was trading near the $110 level, the Biden Administration was eager to get this deal completed. Now that oil prices have fallen more than $30 from their highs of the year, the U.S. government doesn't seem as interested in getting the deal done.

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis        

The main trend is down. A trade through $80.48 will signal a resumption of the downtrend. A move through $95.55 will change the main trend to up.

The minor trend is also down. Taking out $88.83 will change the minor trend to up. This will also shift momentum to the upside.

Retracement Level Analysis

The main range is $60.20 to $110.78. The market is currently trading inside its retracement zone at $85.49 to $79.52.

The minor range is $95.55 to $80.48. Its 50% level at $88.02 is resistance.

The short-term range is $110.78 to $80.48. If the main trend changes to up then look for a test of its retracement zone at $96.78 to $100.08.

The contract range is $34.75 to $110.78. Its retracement zone at $72.77 to $63.79 is the next major downside target. Buyers are likely to come in on a test of this area since it represents value.

Weekly Technical Forecast

The direction of the December WTI crude oil market the week-ending September 30 is likely to be determined by trader reaction to the main 50% level at $85.49.

Bearish Scenario

A sustained move under $85.49 will indicate the presence of sellers. This could trigger a quick break into the minor bottom at $80.48, followed by main 61.8% level at $79.52. Look for a counter-trend technical bounce on the first test of this level.

The Fibonacci level at $79.52 is also a potential trigger point for an acceleration to the downside with the first target the contract's 50% level at $72.77. Look for counter-trend buyers on the first test of this level.

Bullish Scenario

A sustained move over $85.49 will signal the presence of buyers. This could lead to a quick test of the minor pivot at $88.02. Followed by the minor top at $88.83. Overtaking this level will indicate the short-covering rally is getting stronger. If this move generates enough upside momentum then look for a surge into the main top at $95.55.

Short-Term Outlook

I don't think it's a coincidence that oil prices have been under pressure since the Fed started to raise interest rates aggressively this summer. Therefore, it comes as no surprise that prices are lingering near the lows established at the start of war in Ukraine on February 24.

The Fed is doing its job in trying to deflate high asset prices. While this may have helped drive crude prices lower, the charts suggest that until there is a prolonged break under the February war lows, the market is going to be supported.

On Wednesday, the Fed raised its benchmark rate another super-sized 75 basis points and vowed to continue to raise rates until the battle with inflation is won. Furthermore, the Fed warned that there will be "pain", suggesting the economy is going to weaken.

The U.S. Dollar spiked to a new 20-year high this week, which could weigh on foreign demand for dollar-denominated crude oil. Additionally, the yield curve inverted, which is a traditional indication of a recession.

With a multitude of central banks aggressively raising rates, it seems inevitable that the world's appetite for crude oil and fuel would eventually slow, but this assessment is all about demand.

Those calling for lower prices due to a recession may have forgotten that supply is also part of the equation. So while demand concerns may cap gains. Worries about a supply disruption due to the escalation of the war is likely to provide support. This underpins our notion of a rangebound trade.

Technically, our assessment will take a hit if $79.52 is taken out by a wave of heavy selling pressure. However, a move over $85.49 will strengthen our case for a war-driven short-term rally.

Look for the downside bias to extend under $79.52, but for an upside bias to develop on a sustained move over $85.49.