Rising Crude Inventories Cap Oil Prices

U.S. West Texas Intermediate crude oil futures closed sharply higher on Thursday as traders clawed back most of the previous session’s losses. Despite the strong recovery, the market is still in a position to post a more than 1% loss for the week.

On Wednesday, the market plunged on fears that aggressive rates hike by the Fed would drive the economy into recession while putting a dent in fuel demand. Despite this hanging over the market’s head, worries over Russian supply curbs and the potential for an even tighter supply situation helped offset the negative news.

However, gains were limited by a stronger U.S. Dollar and a sharper-than-expected jump in U.S. inventories.

The price action and the battle between those who believe a drop in demand is coming and those who think supply will tighten suggest we’re in for a rangebound trade over the near term albeit a wide range.

Bearish:  Fed Interest Rate Fears

Wednesday’s Federal Reserve minutes showed that policymakers would prefer to hike rates in smaller increments so that they could calibrate incoming data more closely. Fed officials also stood united in the need to continue to raise interest rates until inflation comes down to their 2% mandate.

With the Fed expected to raise rates 25 basis points in March, May, and June, crude oil traders fear that the moves will push the economy into an eventual contraction or perhaps a recession. This would put a strain on crude oil demand and consequently weaken prices.

Bearish:  US Crude Stockpiles Rise for Ninth Week in a Row

U.S. crude oil inventories rose for a ninth week in a row, surging to their most since May 2021, as refiners ran less oil during a strong maintenance season, data from the U.S. Energy Information Administration showed on Thursday.

Crude inventories rose by 7.6 million barrels to about 479 million barrels in the week to Feb. 17, compared with analysts’ expectations in a Reuters poll for a 2.1 million-barrel rise.

Gasoline stocks fell 1.9 million barrels to about 240.1 million barrels, the EIA said, compared with analysts’ expectations for a 110,000-barrel rise.

Distillate stockpiles, which include diesel and heating oil, rose 2.7 million barrels versus forecasts for a 1.1 million-barrel draw. At 121.9 million barrels, distillate supplies were at their highest since January 2022.

Refinery crude runs dropped by 17,000 barrels per day, and refinery utilization rates fell by 0.6% to 85.9% of total capacity.

Bullish:  Russia to Cut Supply

In an exclusive, Reuters reported that Russia plans to cut oil exports from its western ports by up to 25% in March versus February, exceeding its announced production cuts in a bid to lift prices for its oil, three sources in the Russian oil market said.

Russia had already announced plans to cut its oil production by 500,000 barrels per day in March, amounting to 5% of its output or 0.5% of global production.

Bullish:  China’s On-Going Demand Recovery

China’s consumer market recovery was “strong” in January, the commerce ministry said on Thursday, in one of its first optimistic assessments of consumption, which until this year had been reined in by a weak economy and tough COVID-19 policies, Reuters reported.

“From the consumption situation in January, the momentum of recovery in China’s consumer market was relatively strong,” said the ministry’s spokesperson Shu Jueting, adding the government will take more measures to revive and expand consumption.

Weekly Technical Analysis

Weekly April WTI Crude Oil

Trend Indicator Analysis             

The main trend is down according to the weekly swing chart.

A move through $82.89 will change the main trend to up. A trade through $70.86 will reaffirm the downtrend.

The minor trend is also down. A trade through $80.78 will change the minor trend to up. This will shift momentum to the upside. The new minor bottom is $72.64.

Retracement Level Analysis

The contract range is $40.67 to $102.99. Its retracement zone at $71.83 to $64.48 is the next major downside target and value zone.

The minor range is $70.86 to $82.89. Its pivot is $76.88.

The short-term range is $88.65 to $70.86. Its pivot is $79.76.

The main range is $102.99 to $70.86. Its retracement zone at $86.93 to $90.72 is a major upside target area.

Weekly Technical Forecast

The direction of the April WTI crude oil market the week ending March 3 is likely to be determined by trader reaction to the minor pivot at $76.88.

Bullish Scenario

A sustained move over $76.88 will signal the presence of buyers. This could lead to a labored rally with the first target a pivot at $79.76, followed by a minor top at $80.78.

Taking out $80.78 will shift momentum to the upside. This could trigger another surge into the main top at $82.89.

Taking out $82.89 will change the main trend to up. This could create the upside momentum needed to challenge the main retracement zone at $86.93 to $90.72.

Bearish Scenario

A sustained move under $76.88 will indicate the presence of sellers. If this move creates enough downside momentum then look for a test of the support cluster at $71.83 to $70.86.

Short-Term Outlook

Technically speaking, with the minor and main trends down and the market trading on the weak side of a pair of 50% levels at $76.88 and $79.76, it’s safe to say the bias will be to the downside at the start of trading next week.

If the selling pressure continues to generate enough downside momentum then look for a drive into the long-term support zone at $71.83 to $64.48. This is a value zone so we expect to see buyers show up on a test of this area.

But in order to turn the market higher, the market is going to need a catalyst. At this time, the main catalysts for a rally are the Russian output cuts and China’s demand recovery.

The Federal Reserve’s rate hike expectations are the bearish factors keeping a lid on prices. Not only are yields rising, but so is the U.S. Dollar. This is weighing on foreign demand for dollar-denominated crude oil.

Rising rates are also generating recession fears, but the strong economy as measured by GDP, retail sales, and the tight labor market has investors debating whether the Fed’s actions will generate a soft landing, a hard landing, or no landing.

Essentially, any bullish news about China’s demand recovery will be supportive. Any strong economic reports that highlight the need for more Fed rate hikes, drive the U.S. Dollar higher or push the economy closer to a recession will be bearish for crude oil prices.

So we’ve reached a stalemate. The lack of clarity will make investors nervous and encourage them to sell, but a test of the major support zone at $71.83 to $64.48 will bring in the buyers. However, until traders get a clearer picture of the impact of Fed rate hikes, China’s recovery, Russian output cuts, and huge U.S. supply, we see a rangebound trade with a bias to the downside.

Bullish traders have two choices. Wait for a pullback into $71.83 to $64.48, or play a breakout over $82.90.