Traders Remain Cautious Amid Oil Price Volatility

After facing declines for three straight sessions, October West Texas Intermediate (WTI) crude oil prices rebounded on Thursday. However, despite the greenback weakening and China's central bank pushing for economic recovery, the market is still poised to finish lower for the week. Key indicators reveal oil's volatile trajectory this week, impacted by multiple global factors.

OPEC+ and the Global Supply

The OPEC+ alliance, consisting of oil magnates like Saudi Arabia and Russia, remains influential in determining the supply landscape. Despite OPEC+ production cuts, the U.S. has seen a production surge. This dynamism potentially offers U.S. producers the chance to grasp a larger market share.

EIA Inventories and U.S. Dynamics

Recent EIA data suggests robust activity in the U.S. oil market. Crude oil inventories declined by nearly 6 million barrels last week, influenced by heightened exports and refining run rates. Refinery runs reached their pinnacle in January 2020, reflecting the urgency to satiate both domestic and international demand. Moreover, a substantial uptick in U.S. oil exports further depleted the stockpiles. Despite these depletions, U.S. crude production, at its peak since the pandemic's commencement, depicts the industry's resilience. Even with the rig count's recent dip, the production level remains impressive.

China's Economic Concerns

China's economic state is under scrutiny. With the property sector wavering and missed payments by prominent entities, concerns are heightened about China's economic vigor. To counter these apprehensions, China's central bank has reduced key policy rates, the second such move in three months. However, the market's trust in these interventions is guarded. On the upside, China's rare draw on crude oil inventories in July, after 33 months, hints at a potential upswing in demand.

The U.S. Economy and Federal Reserve

The U.S. economy stands at a significant juncture. While recent data suggests resilience, the Federal Reserve's decisions could shift the balance. The Fed's recent minutes reveal the possibility of more rate hikes. With higher interest rates elevating borrowing costs, economic growth might slow, in turn affecting oil demand. This scenario, coupled with the strength of the U.S. dollar, adds layers of uncertainty to oil prices.

Conclusion

Crude oil's dance with supply and demand dynamics, intertwined with global economic factors, continues. As traders and stakeholders weigh the various influences, from China's economic health to U.S. inventory trends, caution remains the watchword. Immediate future predictions might lean bearish, but the potential for bullish upswings remains, depending on global economic maneuvers.

Weekly Technical Analysis

Weekly October WTI Crude Oil

Trend Indicator Analysis             

The main trend is up according to the weekly swing chart. A trade through $85.03 will reaffirm the uptrend. The main trend will change to down if sellers take out the swing bottom at $64.42.  

Retracement Level Analysis

The contract range is $37.88 to $95.40. Its retracement zone at $66.64 to $59.85 is the major support.

The intermediate range is $95.40 to $64.42. The market is currently facing a challenge at its retracement zone at $79.91 to $83.57.  A sustained move over the upper level at $83.57 will indicate the buying is getting stronger. A break back under $79.91 won’t change the trend, but it will be a sign of weakness, probably linked to profit-taking or demand concerns.

The minor range is $64.42 to $84.16. Its retracement zone support is $74.29 to $71.96. This is the primary downside target and near-term value zone.

Weekly Technical Forecast

The direction of the October WTI crude oil market the week ending August 25 is likely to be determined by trader reaction to the intermediate 50% level at $79.91.

Bullish Scenario

A sustained move over $79.91 will signal the presence of buyers. This could create the momentum needed to take out the Fibonacci level at $83.57, followed by the minor top at $84.16.  A move through the main top at $85.03 will reaffirm the uptrend and could trigger an acceleration to the upside with the contract high at $95.40 the next major target price.

Bearish Scenario

A sustained move under $79.91 will indicate the presence of sellers. This could trigger a steep break into the minor retracement zone at $74.29 to $71.96. This is a value zone so with the main trend up, new buyers are likely to step in to buy.

Short-Term Forecast

In light of recent events, a cautious approach towards oil seems prevalent. Concerns from China's economic slowdown, coupled with potential U.S. interest rate hikes, push the market sentiment towards bearishness. While the declining U.S. inventories and China's policy interventions introduce optimism, uncertainties stemming from the broader economic environment overshadow these bullish indicators.

In the immediate future, oil is likely to hover around the key 50% level of $80, with numerous macroeconomic risks in play. China's next steps, the U.S.'s inventory dynamics, and OPEC+ decisions are paramount in shaping the short-term trajectory of oil prices.

Technically, October WTI crude oil’s rejection of the $79.91 to $83.57 retracement zone will confirm trader concerns about the current supply/demand outlook.

Should lower demand fears in the US and China increase then look for the market to trend lower under the 50% level at $79.91. This would open the door for a possible retracement into $74.29 to $71.96.

On the flip-side, holding inside $79.91 to $83.57 will indicate a balanced trade. This would suggest traders are assessing the supply/demand outlook with no clear bias yet.

However, conditions will turn bullish once again on a sustained move over $83.57. A move through this level will suggest traders are betting on more demand from China and a less-hawkish outlook from the Federal Reserve.