Stronger Chinese Oil Imports May Send WTI Above $80

Crude oil futures are in a position to close higher for the week after recovering from earlier setbacks. Notably, both Brent and West Texas Intermediate (WTI) crude futures reached one-week highs, driven by positive demand signals from China and the U.S. This recent uplift positions the market to potentially break a four-week decline, providing a critical moment for traders monitoring market directions.

US Demand Insights

In the U.S., the crude price gains were moderated by concerning demand data. According to the latest Energy Information Administration report, gasoline and diesel demand last week were at their weakest seasonal levels since the 2020 pandemic. Specifically, the 4-week average demand for gasoline was reported at 8.63 million barrels per day, the lowest start-of-May figure since 2020. For distillate fuels, demand stood at 3.60 million barrels per day. This subdued demand has led to reduced refining margins, with the U.S. 3-2-1 crack spread dropping below $26.50 a barrel, a significant dip from previous months. Additionally, gasoline stocks unexpectedly increased by 915,000 barrels to 228 million barrels, indicating potential oversupply issues.

China's Economic Revival

China's crude oil imports in April surged to 44.72 million metric tons, about 10.88 million barrels per day, marking a 5.45% increase from the previous year. This increase was in anticipation of higher fuel demand during the Labour Day holiday. Despite a broader economic slowdown, this rise in imports suggests a rebound in activity, supported by the government's measures to stabilize the economy. Notably, China's exports and imports grew last month, with exports increasing by 1.5% and imports by 8.4%, year-on-year. These figures surpassed expectations and indicated a revitalization in both domestic and international demand.

US Economic Indicators and Fed's Policy Direction

The U.S. economic environment shows signs of cooling, particularly in the labor market where unemployment claims rose to the highest in over eight months at 231,000. This trend could influence the Federal Reserve's strategy, potentially leading to interest rate cuts to invigorate the economy. Such adjustments would likely lower borrowing costs, possibly boosting demand for oil. Investors and traders are keenly observing these developments, as they could have significant implications for commodity investments.

Geopolitical Tensions in the Middle East

The Middle East remains a focal point for potential market disruptions. Recent tensions in Gaza, with potential U.S. sanctions against Israel, introduce uncertainties that could affect oil supply routes and pricing. Specifically, any escalation could reintroduce a risk premium to oil prices, whereas a de-escalation or ceasefire could alleviate some of these risks.

Weekly Technical Analysis

Weekly Light Crude Oil Futures

Trend Indicator Analysis

The main trend is up, but momentum has shifted to the downside, following the closing price reversal top the week-ending April 12.

This chart pattern is 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. This puts $76.91 to $74.49 on the radar. This zone was tested on Wednesday with the market posting its low of the week at $76.89.

A trade through $87.13 will signal a resumption of the uptrend. The main trend will change to down on a move through $66.68.

Weekly Technical Forecast

The direction of the Weekly Light Crude Oil Futures market the week-ending May 17 is likely to be determined by trader reaction to $78.11.  

Bullish Scenario

A sustained move over $78.11 will signal the presence of strong buyers. If this creates enough near-term momentum then we could see an acceleration into the minor 50% level at $82.01 over the near-term.

Bearish Scenario

A sustained move under $78.11 will indicate the presence of sellers. This could lead to a retest of the short-term retracement zone at $76.91 to $74.49. Bullish traders are likely to read a break back into this area as a buying opportunity since it is also a value zone so watch for a technical bounce on new buying. Holding this area could create a rangebound trade. Look out below if $74.49 is taken out with conviction.

Short-Term Forecast

Looking forward into the next week, the market presents a mixed outlook. The potential for reduced U.S. economic performance, coupled with unresolved Middle Eastern tensions, suggests a bearish scenario for oil prices. However, robust demand from China and possible U.S. monetary easing could counterbalance these pressures. The market forecast tilts slightly bearish, reflecting the predominant economic uncertainties and mixed demand forecasts. Traders should brace for potential volatility and consider strategies that mitigate exposure to sudden market shifts.

Technically, the key area to watch is $76.91 to $74.49. A test of this zone on Wednesday helped produce the technical bounce that turned the market higher for the week. A sustained rally will suggest that traders like buying the dips especially when they enter value areas.