January U.S. Crude Prices Plunge
January U.S. crude oil witnessed a significant drop of around 5% on Thursday, hitting a four-month low. This decline in West Texas Intermediate (WTI) crude, which reached its lowest level since early July, reflects growing concerns over global oil demand amidst weakening economic data from the U.S. and Asia. Factors such as increased unemployment claims and a drop in U.S. retail sales signal a potential reduction in oil demand. However, OPEC and the IEA anticipate a supply crunch in the coming quarters, challenging these bearish indicators.
Market Shifts to Contango
The oil market has recently transitioned to a contango structure, where current spot prices are lower than future delivery prices, signaling expectations of oversupply. This shift is accentuated by the lowest crude futures since mid-July, driven by concerns of diminished near-term demand. Despite earlier predictions of oil hitting $100 per barrel, the market scenario has led to the unwinding of these bets, further evidencing a bearish sentiment. Contributing factors include increased U.S. crude inventories and record production levels, coupled with the replenishment of the Cushing, Oklahoma, oil storage hub.
OPEC's Positive Outlook
Contrasting with the market's bearish trends, OPEC maintains a positive outlook. The organization recently raised its forecast for global oil demand growth in 2023, underlining robust market fundamentals such as strong Chinese…
January U.S. Crude Prices Plunge
January U.S. crude oil witnessed a significant drop of around 5% on Thursday, hitting a four-month low. This decline in West Texas Intermediate (WTI) crude, which reached its lowest level since early July, reflects growing concerns over global oil demand amidst weakening economic data from the U.S. and Asia. Factors such as increased unemployment claims and a drop in U.S. retail sales signal a potential reduction in oil demand. However, OPEC and the IEA anticipate a supply crunch in the coming quarters, challenging these bearish indicators.
Market Shifts to Contango
The oil market has recently transitioned to a contango structure, where current spot prices are lower than future delivery prices, signaling expectations of oversupply. This shift is accentuated by the lowest crude futures since mid-July, driven by concerns of diminished near-term demand. Despite earlier predictions of oil hitting $100 per barrel, the market scenario has led to the unwinding of these bets, further evidencing a bearish sentiment. Contributing factors include increased U.S. crude inventories and record production levels, coupled with the replenishment of the Cushing, Oklahoma, oil storage hub.
OPEC's Positive Outlook
Contrasting with the market's bearish trends, OPEC maintains a positive outlook. The organization recently raised its forecast for global oil demand growth in 2023, underlining robust market fundamentals such as strong Chinese imports and a healthy physical oil market. Despite the drop in Brent crude prices, OPEC's report suggests sustained market strength, with expectations of continued production cuts to support market stability.
IEA's Adjusted Forecasts
The IEA, aligning more closely with OPEC's projections, anticipates an increase in world oil demand despite slower global economic growth. However, it foresees a potential market surplus at the start of 2024, a stark contrast to the current deficit sustained by production cuts from major producers. The IEA's forecast for 2024 shows a significant slowdown in demand growth, emphasizing the impact of the pandemic's economic rebound and advancing energy efficiency measures.
China's Economic Indicators
China's recent economic data has exceeded expectations, with industrial output and retail sales demonstrating notable growth in October. This positive trend is somewhat overshadowed by ongoing challenges in the property sector, which continue to impede a full economic revival. Despite various policy measures, China's post-COVID economic recovery has been sluggish, reflecting the complex interplay of domestic and global economic factors.
EIA Report Highlights
The latest EIA report indicates a notable increase in U.S. crude oil stockpiles, alongside unexpected declines in gasoline and distillate inventories. This data points to a shift in U.S. oil market dynamics, with refinery activities picking up pace to meet increasing demand. The surprising draw in gasoline stocks and the reduction in distillate inventories suggest robust demand, potentially leading to further increases in refinery output.
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. 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 stopped the selling the week-ending March 24 at $64.37 and the week-ending May 5 at $65.00.
The intermediate range is $59.36 to $92.21. The market is currently testing its support zone at $74.82 to $71.17. This is a value zone so a test of this area could attract new buyers.
The minor range is $64.27 to $90.27. Its retracement zone at $74.26 to $77.32 is potential resistance.
Weekly Technical Forecast
The direction of the January WTI crude oil market the week-ending November 24 is likely to be determined by trader reaction to the retracement zone at $74.82 to $71.17.
Bullish Scenario
A sustained move over $74.82 will signal the presence of strong counter-trend buyers. If this creates enough near-term momentum then look for a test of the minor 50% level at $77.32. Since the main trend is down, sellers are likely to come in on a test of this level.
Bearish Scenario
A sustained move under $74.82 will indicate the presence of strong sellers. This could create the downside momentum needed to challenge the intermediate Fibonacci level at $71.17. This is a potential trigger point for an acceleration to the downside with $65.35 the next major target.
Short-Term Weekly Forecast
Considering the current factors affecting the trade, the short-term outlook for the oil market appears to be cautiously bearish. The contango market structure, combined with rising crude inventories and weakening economic indicators in major economies, points towards an oversupply scenario. However, ongoing geopolitical tensions and policy decisions by major oil-producing nations could introduce volatility and uncertainty in the market, potentially influencing future price movements.
The technical picture is less clear. The fact that the trend is down at the same time the market is testing a major support zone could contribute to heightened volatility. With the strong possibility of a technical reversal inside the $74.82 to $71.17 support area, short-sellers have to be careful not to get caught in a bear trap by shorting into weakness.
The key to whether there is a reversal to the upside will be trader reaction to $74.82 to $71.17. If the latter fails as support then look for the aggressive selling to possibly extend into at least $65.35. This will be another major opportunity for bottom-pickers.