Profit Taking Is Putting Downward Pressure on Oil Prices

Selling Pressure, Profit-Taking Dominate Trade

This week, crude oil markets experienced significant volatility to the downside, driven by geopolitical concerns, unexpected inventory adjustments, and changes in demand. Although escalation fears between Israel and Iran loomed over the markets, price responses were muted, reflecting a complex set of influences on oil pricing.

Geopolitical Tensions and Market Responses

Concerns over potential supply disruptions due to tensions between Israel and Iran were top of mind this week. However, Israel's response - after briefly sending oil prices higher - had a negligible impact on oil prices. Additionally, while U.S. sanctions on Venezuela's oil industry remain in effect, they were less impactful compared to the immediate issues in the Middle East. The market's tempered reaction suggests a resilience or perhaps skepticism towards the probability of severe disruptions in oil flows, which has helped stabilize price levels.

Inventory Surges and Demand Anomalies

The U.S. Energy Information Administration (EIA) reported a surprising rise in crude inventories, the highest since mid-2023, which applied downward pressure on oil prices. This inventory build, coupled with reduced refinery activity, suggests adjustments that might reflect softer demand or strategic refinery operations.

Globally, oil demand has not met previous estimates, with consumption consistently lower than expected. This underperformance is crucial as it informs perceptions about the strength of the global economic recovery and its impact on energy consumption.

U.S. and Global Inventory Levels

Despite geopolitical fluctuations, U.S. crude oil inventories align closely with long-term averages, indicating no immediate risk of dramatic price increases due to supply shortages. Internationally, OPEC+ has maintained significant idle capacity, serving as a buffer against potential supply shocks and stabilizing the market amidst various uncertainties.

Economic Indicators and Market Sentiment

The relationship between rising inventory levels and lukewarm demand growth continues to influence market sentiment. Economic indicators such as manufacturing outputs, consumer spending, and employment rates in key economies directly impact oil demand predictions. Currently, the oil market is parsing these mixed signals, assessing both short-term and future trends.

Short-Term Market Forecast

The outlook for crude oil in the short term remains bearish. The mix of high inventory levels, extensive spare production capacity, and lukewarm demand suggest potential price declines. This forecast could change with shifts in geopolitical conditions or unexpected economic developments that could increase demand.

Additionally, the forthcoming U.S. summer driving season may temporarily lift demand, but it is unlikely to reverse the general market trend unless significant economic improvements occur or there are substantial cuts in global oil production. Traders are advised to monitor the market closely, as conditions suggest continued price volatility with a tendency towards lower prices in the near term.

This overview captures the current state of the oil market, reflecting the interplay of supply, demand, and external economic factors. Traders must remain alert to new information and be ready to act on developments that could impact market conditions and oil price trends.

Weekly Technical Analysis

Weekly June WTI Crude Oil

Trend Indicator Analysis

The main trend is up, but momentum has shifted to the downside, following this week's confirmation of the previous week's closing price reversal top.

This chart pattern tends to last 2 to 3 weeks. It's not a change in trend, but a correction to alleviate some of the upside pressure. Furthermore, it tends to end, following a 50% to 61.8% retracement of the last rally.

Retracement Level Analysis

The contract range is $39.16 to $88.15. Its retracement zone at $63.66 to $57.87 is the major support zone. This area stopped the selling the week-ending May 5, 2023 at $65.65. This is a major long-term value zone.

The intermediate range is $62.65 to $86.83. Its retracement zone at $74.74 to $71.89 is support.

The minor range is $69.08 to $86.83. Its retracement zone at $77.96 to $75.86 is another value zone.

Weekly Technical Forecast

The direction of the June WTI crude oil market the week-ending April 26 is likely to be determined by trader reaction to a minor pivot at $84.01.

Bullish Scenario

A sustained move over $84.01 will signal the presence of strong buyers. If this creates enough near-term momentum then we could see an acceleration to the upside with the main tops at $86.97 and $88.15 the next targets. The latter is a potential trigger point for an acceleration to the upside that could put $100 a barrel on the radar.  

Bearish Scenario

A sustained move under $84.01 will indicate the presence of sellers. This could drive the market into the short-term retracement zone at $78.03 to $75.91. Holding this area could create a rangebound trade. Bullish traders are likely to read a break back into this area as a buying opportunity since it is also a value zone.

Short-Term Forecast

The outlook for the oil market remains bearish in the short term due to high inventory levels, ample production capacity, and muted demand growth. Although geopolitical risks persist, they are unlikely to cause actual supply disruptions that could significantly change market dynamics at this time. Investors and traders should anticipate potential declines in oil prices, reflecting the broader economic and geopolitical conditions.

In conclusion, while the oil market is dealing with a period of significant uncertainty and potential price adjustments, the core indicators point to a bearish trend in the near term. This outlook is shaped by the current stability in supply, the lack of significant disruptions despite ongoing geopolitical tensions, and the broad impact of global economic conditions on oil demand.

Technically, the bearish fundamentals are being accompanied by last week's confirmed closing price reversal top that should create enough downside momentum to fuel a break into a minor retracement zone at $78.03 to $75.91.

Since the main trend is up, buyers are likely to return on a pullback into this value zone.