Why Oil Prices Hit a 6-Month Low

Global oil markets are witnessing a significant downturn, with prices dropping to six-month lows. This trend is primarily driven by concerns over energy demand in key markets such as the United States and China. As of Thursday, the international benchmark February Brent crude futures and U.S. benchmark December West Texas Intermediate (WTI) crude futures have both plummeted to their lowest levels since June, indicating bearish sentiment in the market.

Factors Affecting Supply and Demand

The current oil market scenario is a complex interplay of various factors affecting supply and demand:

U.S. Production Levels: The United States, one of the world's largest oil producers, continues to maintain near-record output levels. Data from the U.S. Energy Information Administration indicates a sustained production of over 13 million barrels per day. This high level of output is exerting downward pressure on prices.

Surge in U.S. Gasoline Stocks: U.S. gasoline stocks have experienced a significant rise, far surpassing market expectations. Such a build-up in gasoline inventories points towards a potential oversupply in the market, contributing further to the bearish outlook.

China's Diminishing Demand: China, the world's largest oil importer, has shown a marked reduction in its demand for crude oil. This decline is attributed to high inventory levels and weakening economic indicators, particularly in sectors like manufacturing and construction. Additionally, the fall in crude oil imports in November underscores a broader economic slowdown in China, dampening global oil demand.

OPEC+ Decisions and Market Skepticism

Despite OPEC+, comprising the Organization of the Petroleum Exporting Countries (OPEC) and its allies, announcing voluntary output cuts of approximately 2.2 million barrels per day for the first quarter of next year, the market response has been lukewarm. This skepticism likely stems from doubts over OPEC+'s capability to effectively implement and adhere to these cuts. Key exporters like Saudi Arabia and Russia are advocating for a unified approach to output cuts, but the market remains unconvinced about the impact of these measures.

U.S. Labor Market Indicators and Economic Health

The U.S. labor market is presenting mixed signals:

Jobless Claims: Recent jobless claims were slightly below expectations, indicating a stable labor market, which in normal circumstances would signal a robust economy and consequently higher energy demand. However, the current scenario is different as the market is also considering other factors.

Continuing Jobless Claims: A decline in continuing jobless claims suggests that layoffs are not accelerating. However, this does not offset the overall negative sentiment driven by other market indicators.

Impact on Federal Reserve Policies: A stable labor market typically provides the Federal Reserve with a rationale to maintain a tight monetary policy, including steady interest rates. However, given the current global economic uncertainties, this might not be sufficient to bolster oil prices.

Weekly Technical Analysis

Weekly January WTI Crude Oil

Trend Indicator Analysis             

The main trend is down according to the weekly swing chart. The main trend turned down the week-ending November 10th when sellers took out the last main bottom at $76.75.

One potential downside target is the main bottom at $64.37. Taking out this level will reaffirm the downtrend. The trend will change to up on a move through $90.27. A trade through $93.92 will reaffirm the uptrend.

Retracement Level Analysis

The contract range is $38.49 to $92.21. Its retracement zone at $65.35 to $59.01 is the major support zone. This area stopped the selling the week-ending March 24 at $64.37 and the week-ending May 5 at $65.00. This is a major long-term value zone.

The intermediate range is $59.36 to $92.21. Its retracement zone is $74.82 to $71.17. The market found support inside this zone for three weeks before finally succumbing to selling pressure. A close below this area on Friday will turn it into resistance.  

The first minor range is $64.37 to $90.27. Its 50% level at $77.32 is another potential resistance target.

Weekly Technical Forecast

The direction of the January WTI crude oil market the week-ending December 15 is likely to be determined by trader reaction to the intermediate Fibonacci level at $71.17.

Bullish Scenario

A sustained move over $71.17 will signal the presence of strong counter-trend buyers. If this creates enough near-term momentum then look for a test of the intermediate 50% level at $74.82, followed by the short-term 50% level at $77.32. Since the main trend is down, sellers are likely to re-emerge on a test of these levels.

Bearish Scenario

A sustained move under $71.17 will indicate the presence of strong sellers. This could create the downside momentum needed to challenge the long-term retracement zone support at $65.35 to $59.01.

Short-term Weekly Forecast: Bearish Market Sentiment

Considering all these factors, the short-term forecast for the oil market is decidedly bearish:

High U.S. Production: The sustained high output from the U.S. is likely to continue exerting pressure on oil prices.

Reduced Demand from China: China's reduced crude oil imports, combined with its broader economic challenges, significantly impact global oil demand. The potential downgrade warnings on China's credit rating by Moody's also exacerbate concerns about the country's economic stability and future fuel demand.

Market Response to OPEC+ Decisions: The lackluster response to OPEC+'s output cuts reflects a market more concerned with demand issues than supply restrictions. The market seems to anticipate that the cuts won't be enough to counteract the prevailing demand-side weaknesses.

Global Economic Indicators: The global economic outlook, especially the slowdown in major economies like Germany and the mixed signals from the U.S. labor market, are adding to the cautious approach of investors and traders.

In conclusion, the oil market is currently experiencing a phase characterized by supply overhangs, wavering demand, and broader economic uncertainties. These elements collectively contribute to the prevailing bearish sentiment, with market participants closely monitoring upcoming economic data and OPEC+ actions for any potential shifts in this trend.

Technically Speaking…

With the weekly main trend down and momentum pointing decisively lower, it looks as if January WTI futures will have to test the long-term support area at $65.35 to $59.01 before we could see a significant amount of buying to stop the selling pressure.