The Oil Market Has Shifted Into A New Cycle

Saudi Production Cuts Provide Early Boost to Crude Oil Prices

Monday began with a surge in U.S. WTI crude oil prices, driven by Saudi Arabia's announcement of an additional production cut of 1 million barrels per day starting in July. The world's top oil exporter aimed to counteract the macroeconomic challenges that had been weighing on the market. The Saudi energy ministry revealed that the kingdom's output would decrease to 9 million barrels per day, marking its most significant reduction in years and contributing to recent gains in oil prices. This unexpected decision by Saudi Arabia aligned with the broader agreement made by OPEC+ to limit oil supply until 2024, resulting in a bullish outlook for the short-term oil market.

Global Economic Worries Dampen Oil Prices

However, concerns over global economic headwinds deepened on Wednesday, erasing the gains made earlier in the week. The initial surge in U.S. WTI crude oil prices following Saudi Arabia's commitment to output cuts was short-lived. Worries about a looming recession and somber economic readings put a lid on oil prices, undermining the efforts of OPEC+ to maintain stability. Additionally, reports from the American Petroleum Institute (API) revealed an unexpected buildup in U.S. gasoline and distillates inventories, raising concerns about fuel consumption and the ability of the top oil consumer to maintain robust demand.

Volatile Price Action Persists

The negative sentiment surrounding oil prices persisted on Thursday after a news report suggested that the U.S. and Iran were close to reaching an agreement on oil exports. WTI oil prices initially dropped by over $3 per barrel in response to the report, which indicated a temporary deal where Iran would reduce uranium enrichment in exchange for some relief from oil-related sanctions. However, these losses were partially reversed when doubts arose about the quick lifting of oil sanctions, and the White House declared the news report false. A spokesperson from the White House National Security Council denounced the report as false and misleading, referencing an article published on the Middle East Eye website. The U.S. had implemented sanctions on Iran's oil sector in 2018 after withdrawing from the 2015 nuclear deal.

Mixed Events Lead to Flat-to-Lower Trade

Despite the volatility and fluctuations throughout the week, WTI oil prices were lower overall. Concerns about a global economic slowdown impacting demand overshadowed Saudi Arabia's promised output cuts. The market sentiment was also affected by rising fuel stocks in the United States and disappointing Chinese export data. The unexpected increase in U.S. fuel inventories, particularly gasoline and distillates, raised concerns about demand from the world's largest oil consumer. While Saudi Arabia's additional production cut was seen as a positive development, analysts expressed skepticism about the long-term support it would provide to oil prices. The outlook for oil prices remained uncertain, with supply tightening but weak demand projections for the year.

Weekly Technical Analysis

Weekly July WTI Crude Oil

Trend Indicator Analysis             

The main trend is down according to the weekly swing chart. A trade through $63.90 will reaffirm the downtrend. A move through $82.91 will change the main trend to up.

Retracement Level Analysis

The contract range is $37.18 to $99.09. Its retracement zone at $68.13 to $60.83 is the major support. The market successfully tested this area the week-ending May 5 at $63.90 and again the week-ending June 2 at $67.03. The price action over the past three months indicates that this area is a value zone.

The minor range is $82.91 to $63.90. Its retracement zone at $73.41 to $75.65 is resistance. It stopped the rally this week at $75.06. The market would have to overcome this zone to get excited about the upside potential.

 Weekly Technical Forecast

The direction of the July WTI crude oil market the week-ending June 16 is likely to be determined by trader reaction to the minor 50% level at $73.41.

Bullish Scenario

A sustained move over $73.41 will signal the presence of buyers. This could lead to a quick test of the minor Fibonacci level at $75.65. Overcoming this level could trigger an acceleration to the upside.

Bearish Scenario

A sustained move under $73.41 will signal the presence of sellers. This could lead to a retest of the major 50% level at $68.13. This level has to hold or prices could collapse into the support cluster at $67.03 - $63.90.

Short-Term Outlook - Cautious

This week was marked by volatility for July WTI crude oil futures. The initial boost from Saudi Arabia's output cut was overshadowed by concerns over global economic headwinds and rising inventories. The report of a potential U.S.-Iran agreement on oil exports caused a significant drop in oil prices, but the losses were later reversed when doubts emerged and the news report was declared false.

The market sentiment is like to remain cautious, and the short-term outlook for oil prices is limited. However, the summer driving season in the United States and tighter global supply conditions held the potential for upside movement, while the planned purchase of crude oil for the Strategic Petroleum Reserve by the U.S. government may help mitigate downside risks.

The weekly chart indicates a recurring pattern where lower prices in value areas attract buyers, but there is limited motivation to break out towards higher levels. The price action implies that the market has potentially shifted into a cycle of "buy the dip" and "sell the rally."