Oil Traders Fear Further Interest Rate Hikes

U.S. February West Texas Intermediate crude oil futures surged early on Thursday. The rally was fueled by tight U.S. supplies including crude, heating oil, and jet fuel stocks. However, gains were erased late in the session on fears that higher Fed rate hikes and China's rising Covid cases would put a dent in demand. Early on Friday morning, however, oil prices were rising once again on news of a potential Russian output cut.

Crude, Distillate Drawdowns Surprisingly Bullish

The U.S. benchmark extended Wednesday's price jump which was ignited by a government report that showed U.S. crude inventories fell by much more than analysts had expected, posting a drop of 5.89 million barrels for the week ending on December 16.

Distillate stocks, which include heating oil and jet fuel, also surprised traders with an unexpected drawdown.

API Reports Larger-than-Expected Drawdown

U.S. crude inventories fell by about 3.1 million barrels in the week to Dec. 16, according to the American Petroleum Institute (API). Nine analysts polled by Reuters had forecast a drop of 1.7 million barrels.

Official government data from the Energy Information Administration (EIA) is expected to show a 2.5 million barrel build. A surprise draw should be bullish for crude oil prices.

Underpinned by Saudi Energy Minister's Comments

Reuters reported that prices were also boosted by comments from Saudi Arabia's energy minister, who said on Tuesday that the heavily criticized move by OPEC+ to cut oil output turned out to be the right decision.

"Playing politics with statistics and forecasting and not maintaining objectivity often tend to backfire and result in loss of credibility," the energy minister said.

In the face of a wide range of uncertainties, OPEC+ has no choice but to remain proactive and pre-emptive, he said.

The remarks suggest that OPEC+ may continue to keep supply tight at next month's policy meeting.

Weekly Technical Analysis

Weekly February WTI Crude Oil

Trend Indicator Analysis             

The main trend is down according to the weekly swing chart. A move through $91.19 will change the main trend to up. A trade through $60.05 will reaffirm the downtrend.

The minor trend is also down. A trade through $83.27 will change the minor trend to up. This will also shift momentum to the upside.  

Retracement Level Analysis

The contract range is $36.16 to $106.51. Its retracement zone at $71.34 to $63.03 is the next major downside target and value zone.

The minor range is $83.27 to $70.31. Its pivot at $76.79 is the nearest resistance.

The short-term range is $91.19 to $70.31. Its retracement zone at $80.75 to $83.21 is additional resistance.  

Weekly Technical Forecast

The direction of the February WTI crude oil market the week-ending December 30 is likely to be determined by trader reaction to the minor pivot at $76.79.

Bullish Scenario

A sustained move over $76.79 will signal the presence of buyers.  If this move creates enough upside momentum then look for a surge into the short-term retracement zone at $80.75 to $83.21.

Overtaking $83.27 will shift momentum to the upside and could trigger an acceleration to the upside with $91.19 the next major target price.

Bearish Scenario

A sustained move under $76.79 will indicate the presence of sellers. If this move creates enough downside momentum then look for the selling to possibly extend into the support cluster at $71.34 to $70.31.

A failure to hold $70.31 could trigger an acceleration to the downside with $63.03 the next major target price.  

Short-Term Outlook

The February WTI crude oil market was on course to post a solid weekly gain until Thursday when traders decided to square positions and book profits ahead of the long Christmas holiday weekend.

That was not the only reason for the late session sell-off. Bullish traders seemed to be operating throughout the week as if the Federal Reserve had announced a pivot away from further interest rate hikes. Without any Fed speakers to reiterate a hawkish tone, crude oil traders seemed to cast aside the threat of more interest rate hikes.

However, Thursday's reported jump in U.S. Third Quarter GDP from 2.9% to 3.2% brought traders back to reality because it served as notice that the U.S. economy is not slowing after a number of Fed rate hikes. Furthermore, the news may have greenlit the Fed to continue on its aggressive interest rate path.

The news also pushed up yields as well as the U.S. Dollar. Since crude oil is a dollar-denominated asset, a stronger dollar could weigh on near-term demand.

Rising Covid cases in China are the wildcard since the country's leaders could re-establish their harsh constraints and restrictions at any time. This would hit demand hard and could push the world into a recession.

U.S. supplies could continue to tighten as the U.S. refills its Strategic Petroleum Reserve, but that is not going to be enough to sustain a rally. The market needs to see a jump in demand before buyers will come in with clarity and conviction.

We're looking for a sideways trade into the New Year.