Oil Under Pressure From Fed, Dollar, And Demand Woes

December U.S. West Texas Intermediate crude oil futures are trading sharply lower late Thursday after a tentative agreement that would avert a U.S. rail strike wiped out three days of speculative gains. Sellers were also driven by expectations for weaker global demand and continued U.S. Dollar strength ahead of next week’s potentially one-percentage point rate increase by the U.S. Federal Reserve.

On Thursday, it was the news that a railroad strike had been averted that drove prices lower, but the groundwork for the sell-off had been building all week due as a number of bearish factors outweighed the potentially bullish news.

Bearish Factor: Speculative Buyers Head for the Exits after Railway Strike is Averted

After posting a small gain early in the session on Thursday, crude oil prices began to weaken following an announcement by President Joe Biden that a tentative railway labor deal to avert a national rail strike that threatened to shut a major segment of the U.S. transportation network had been reached.

The agreement would improve rail workers pay, working conditions, and give them “peace of mind around their health care costs,” Biden said in a statement.

Negotiators from railroad carriers and unions met in Labor Secretary Marty Walsh’s office Wednesday as the sides tried to negotiate a deal ahead of Friday’s strike deadline.

Bearish Factor:  US Crude Stockpiles Rise for Second Straight Week

U.S. crude stocks and distillate inventories rose more than expected in the most recent week, while fuel demand remained below last year’s levels, the Energy Information Administration said on Wednesday.

The gains were boosted by an 8.4-million-barrel release from the U.S. Strategic Petroleum Reserve (SPR) into commercial stocks; those releases are set to end in October, and supply is expected to tighten at that time.

Bearish Factor:  Distillate Stockpiles Rise, Product Supplied Drops

Refinery crude runs rose by 93,000 barrels per day, boosting refinery utilization rates by 0.6 percentage points to 91.5%. The increase helped distillate stockpiles, which include diesel and heating oil, to build by 4.2 million barrels to 116 million barrels. Distillate stocks have been at lower-than-usual levels due in part to heavy export demand from Europe, and profit margins are high as refiners try to meet consumption headed into winter heating oil use.

Product supplied by refiners, a proxy for demand, was at 19.7 million bpd over the last four weeks, off by 7% from the same time period a year ago. Demand has sagged as the economy has started to slow in response to persistently high energy costs.

Bearish Factor: Demand to Weaken

The International Energy Agency (IEA) said on Wednesday demand growth would grind to a halt in the fourth quarter. Additionally, expectations the U.S. Federal Reserve will continue to tighten policy could drive the U.S. Dollar beyond its recent 24-year peak. This could weigh on demand because crude oil is a dollar-denominated commodity.

According to the latest reading of the CME’s FedWatch Tool, U.S. futures traders are pricing in an 80% chance of a 75-basis-point rate hike on September 21 and a 20% chance of a 100-basis-point rate hike.

Bullish Factor:  Armenia Clashes with Azerbaijan

Traders are eyeing the skirmish between Armenia and Azerbaijan. A full-fledged conflict would risk dragging in Russia and Turkey, and destabilize an important corridor for oil and gas pipelines just as war in Ukraine disrupts energy supplies.

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis        

The main trend is down. A trade through $80.40 will signal a resumption of the downtrend. A move through $95.55 will change the main trend to up.

Retracement Level Analysis

The main range is $60.20 to $110.78. The market is currently testing 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 23 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.

The Fibonacci level at $79.52 is 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. Overtaking this level will indicate the short-covering rally is getting stronger with the main top at $95.55 the next target.

Short-Term Outlook

We’re expecting more sideways to lower trading until at least October when the U.S. will stop drawing crude oil from its Strategic Petroleum Reserve (SPR). This could put a cap on supply. However, there will still be an issue with demand especially since the Fed may raise its key interest rate by one-full basis point on September 21.

The higher the Fed increases rates, the closer the economy comes to recession, which will weigh on demand.

Long-term bulls are looking for value, but it’s hard to find it when bearish factors are piling up. Bullish traders aren’t likely to find value until the retracement zone at $72.77 to $63.79 is tested. But even if this area attracts buyers and holds as support, the market is going to have a hard time posting a meaningful rally until the U.S. Dollar weakens substantially. However, that’s not likely until the Fed starts to slow the size and pace of its super-sized rate hikes.