Why the Short Term Outlook for Oil Remains Bearish

The crude oil market is currently grappling with heightened volatility, primarily driven by escalating tensions in the Middle East. A notable uptick in oil prices, nearly 1%, was triggered by Iran's seizure of an oil tanker off Oman's coast, amplifying fears of intensifying conflicts in this key oil-producing region. This incident caps a period where oil benchmarks initially increased over $2 a barrel but later faced downward adjustments, influenced by unexpected rises in U.S. inflation and a decrease in China's demand for Saudi oil. The tension escalated with Iran's capture of a tanker transporting Iraqi crude, a retaliatory move against the U.S. for a similar prior incident.

Red Sea Shipping Under Threat

The oil market is also contending with increased risks in the Red Sea shipping lanes, a crucial route for global oil transportation. The Houthi group in Yemen, backed by Iran, has intensified its attacks in this region, prompting concerns from global powers. The U.S. and Britain have indicated possible further actions, while the U.N. Security Council has demanded an immediate halt to the Houthi's aggressive actions. These developments are contributing to the uncertainty in the oil market, as any escalation could significantly disrupt shipping routes.

Fluctuating Supply and Demand

On the supply side, recent data indicates an unexpected increase in U.S. crude inventories, suggesting a potential softening in crude and refined product exports. This increase contrasts with earlier predictions of a decrease in stockpiles and points to a shift in the supply landscape. Meanwhile, the demand outlook is clouded by Europe's challenging economic conditions, with indications of a potential recession in the euro zone, which could dampen oil demand.

Market Reactions and Energy Futures

The market is currently balancing the effects of growing geopolitical tensions against economic growth concerns. In the U.S., diesel and gasoline futures have responded to these developments with notable increases, driven by both the geopolitical situation and forecasts of severe cold. This trend underscores the influence of product demand on crude oil markets, as higher demand for refined products typically leads to increased crude purchases by refiners.

Bearish Market Influences and Economic Indicators

Bearish factors are also evident in the market. The recent rise in U.S. inflation, higher than initially expected, could potentially delay the Federal Reserve's anticipated interest rate cut. This delay might dampen investor sentiment, potentially leading to a decrease in crude oil prices. In addition, China's reduced demand for Saudi oil, combined with Saudi Arabia's significant price cuts, is adding to the market's uncertainty.

Weekly Technical Analysis

Weekly March 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 $76.10

One potential downside target is the main bottom at $63.00. Taking out this level will reaffirm the downtrend. The trend will change to up on a move through $86.68. A trade through $90.14 will reaffirm the uptrend.

The minor trend is also down. A trade through $76.31 will change the minor trend to up. This will also shift momentum to the upside.

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 at $63.92 and the week-ending May 5 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 is the next potential upside target area.

The closeness of these retracement zones is helping to generate the choppy, rangebound trade.

Closing Price Reversal Bottom Chart Pattern

Following the prolonged move down in terms of price and time, March WTI crude oil posted a closing price reversal bottom on the weekly chart during the week-ending December 15. The market is still respecting this chart pattern which is helping to underpin prices.

The market is now consolidating between $68.28 and $76.31 as traders assess the current fundamental situation before making their decision to either buy strength or sell weakness.

Weekly Technical Forecast

The direction of the March WTI crude oil market the week-ending January 19 is likely to be determined by trader reaction to $74.57 and $70.89.

Bullish Scenario

A sustained move over $74.57 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 with $76.83 to $80.03 a potential upside target.

Bearish Scenario

A sustained move under $70.89 will indicate the presence of strong sellers. This could create the downside momentum needed to challenge the 50% levels at $65.83 and $64.52, and the main bottom at $63.00.

Bearish Short-Term Outlook

Given these diverse factors, the short-term forecast for the crude oil market is leaning towards a bearish trend. The combination of reduced demand from key importers like China, the increase in U.S. oil inventories, and economic uncertainties in Europe, suggest a downward pressure on oil prices.

However, this forecast is subject to change based on ongoing geopolitical developments, particularly in the Middle East, and key economic indicators, such as China's forthcoming trade data and political developments in Taiwan. Traders are advised to stay alert to these changing market conditions, as they hold significant implications for future oil pricing trends.