What to Watch in Oil Markets Next Week

The global oil market is currently facing a unique set of challenges and opportunities, influenced by various factors including China's economic slowdown, fluctuations in US crude inventories, OPEC's strategic moves, and the evolving geopolitical landscape in the Middle East. These elements are crucial in shaping the short-term outlook for crude oil prices.

China's Economic Influence on Oil Demand

China's role as a major oil consumer means its economic health is a key driver of global oil demand. The country's recent economic slowdown, fueled by the property sector crisis and ongoing COVID-19 challenges, has sparked concerns over a potential decrease in oil consumption. Although JPMorgan projects a 4.9% growth in China's economy, the market remains wary. A prolonged economic downturn in China could significantly impact global oil demand, potentially leading to lower oil prices.

US Crude Inventory and Production Trends

Recent data from the Energy Information Administration (EIA) shows a record US crude production of 13.31 million barrels per day, mainly from Texas and New Mexico. This increase could help alleviate global supply constraints. However, the unexpected rise in US crude inventories suggests a surplus in supply over demand, which might put downward pressure on oil prices.

OPEC's Role in Stabilizing Prices

OPEC's ongoing production cuts of 2.2 million barrels per day are crucial in maintaining current oil prices. The organization's commitment to these cuts has been evident, but the impact on prices could be mitigated by increased production from non-OPEC countries like the US and Brazil, and potential compliance issues within OPEC itself.

Middle East Geopolitics and Potential Ceasefire Impacts

The Middle East's geopolitical situation, particularly the Israel-Hamas conflict, has historically been a significant factor in oil pricing. The potential for a ceasefire in the region could lead to a reduction in the geopolitical risk premium currently factored into oil prices. If a ceasefire is achieved, it could prompt speculative long buyers to liquidate their positions, potentially erasing the 'war premium' and leading to lower oil prices. However, the situation remains dynamic, and any escalation could reverse this trend.

Weekly Technical Analysis

Weekly March WTI Crude Oil

Trend Indicator Analysis

The main trend is down according to the weekly swing chart, but the minor trend is up.

A trade through $86.68 will change the main trend to up. A move through $68.28 will signal a resumption of the downtrend.

Retracement Level Analysis

The contract range is $38.76 to $90.14. Its retracement zone at $64.52 to $58.46 is the major support zone. This area stopped the selling the week-ending March 24, 2023 at $63.92 and the week-ending May 5, 2023 at $63.00. This is a major long-term value zone.

The intermediate range is $41.52 to $90.14. Its retracement zone at $65.83 to $60.09 is additional support. A second intermediate range is $58.99 to $90.14. Its retracement zone is $74.57 to $70.89.

The minor range is $90.14 to $63.00. Its retracement zone at $76.57 to $79.77. This zone stopped the rally at $79.29 on January 29.

Closing Price Reversal Top Chart Pattern Developing

Following the prolonged move up in terms of price and time, March WTI crude oil is in a position to post a potentially bearish closing price reversal top during the week-ending February 2. A close under $78.01 will complete the chart pattern. If confirmed next week, this could trigger the start of a 2 to 3 week correction.  

Weekly Technical Forecast

The direction of the March WTI crude oil market the week-ending February 9 is likely to be determined by trader reaction to the intermediate 50% levels at $74.57 and $76.57.

Bullish Scenario

A sustained move over $76.57 will signal the presence of strong counter-trend buyers. If this creates enough near-term momentum then look for the counter-trend rally to continue into the intermediate 61.8% retracement level at $79.77. This price is both potential resistance and a trigger point for an acceleration to the upside.

Bearish Scenario

A sustained move under $74.57 will indicate the presence of sellers. This could drive the market into 61.8% support at $70.89.

Rangebound Possibilities

Brace yourself for another round of rangebound trading if $70.89 holds as support and $79.77 holds as resistance.

Short-Term Market Forecast

Considering the fundamental factors, the short-term outlook for crude oil prices appears bearish. The potential easing of Middle East tensions, coupled with the US's increasing crude production and China's economic slowdown, suggests a possible decrease in oil prices. Market participants should closely monitor these developments, as they will play a critical role in shaping the oil market in the coming months.

Technically speaking, the formation of a closing price reversal top, following an eight week rally, is potentially bearish. Although we may not see a return to the low-$68 area reached in mid-December, the market is also likely to have trouble rallying above $80 without a “war premium”. These two prices are likely to define the near-term trading range.

The near-term direction actually hinges upon whether there is a cease fire. If one is reached, look for gains to be capped and the market to settle into a range. If there is no cease fire, then the situation in the Middle East will likely escalate, leading to higher prices and a potential breakout over $80.