Oil Bounces Back on Rate Cut Optimism

Oil Market Weekly Recap and Forecast

Oil prices closed higher on Thursday, rebounding after a week of significant losses. The market reacted positively to the European Central Bank's (ECB) decision to cut interest rates, which raised hopes that the Federal Reserve might follow suit. Additionally, reassurances from OPEC+ ministers about potential adjustments to their oil output agreement provided some support. However, the overall sentiment remains cautious due to mixed economic signals and increasing oil inventories in the U.S.

Central Bank Actions and Implications

The ECB's recent interest rate cut, its first since 2019, marked a significant effort to tackle inflation. Following this, Denmark's central bank also lowered its benchmark interest rate by 25 basis points to 3.35%. The ECB cited progress in reducing inflation, which fell to 2.6% in the eurozone from 10% in late 2022. These actions by European banks have led analysts to speculate that the Federal Reserve might cut rates in September, especially as lower fuel costs and easing supply chain issues contribute to the inflation decline. However, the prospect of rate cuts comes amidst a slowing economy, which could negatively impact oil demand despite the immediate supportive effect on market sentiment.

US Economic Indicators and Fed Expectations

In the United States, economic indicators present a mixed picture. The number of new unemployment claims rose last week, and first-quarter unit labor costs increased by less than initially reported, signaling a cooling labor market. Despite these indicators, the likelihood of immediate rate cuts by the Federal Reserve remains uncertain. Analysts believe that the cooling labor market alone may not be sufficient to prompt the Fed to reduce rates, even though market participants remain hopeful for a potential rate cut in the near future.

EIA Report: Rising Inventories and Refinery Activity

The Energy Information Administration (EIA) reported an unexpected rise in U.S. crude oil stockpiles last week. Crude inventories increased by 1.2 million barrels to 455.9 million barrels, contrary to analysts' expectations of a 2.3 million-barrel draw. The rise in inventories was attributed to steady production and net imports, along with an adjustment figure from the EIA to balance supply and demand data.

Refinery activity ramped up significantly, with crude runs reaching 17.1 million barrels per day, the highest since December 2019. Refinery utilization rates also climbed to 95.4% of total capacity. This increase in refining activity led to a build in gasoline stocks by 2.1 million barrels to 230.9 million barrels, and distillate stockpiles, which include diesel and heating oil, rose by 3.2 million barrels to 122.5 million barrels. Despite these increases, gasoline demand remained below 9 million barrels per day, a concerning figure given the start of the summer driving season.

OPEC+ and Market Interpretations

OPEC+ recently decided to extend most production cuts into 2025 while allowing for gradual adjustments from eight member countries. Saudi Energy Minister Prince Abdulaziz bin Salman and Russian Deputy Prime Minister Alexander Novak indicated that OPEC+ could adjust production increases if the market conditions are deemed weak. This flexibility in OPEC+ strategy aims to stabilize prices, although the recent meeting outcome has been perceived negatively by the market.

Trading house Trafigura noted that the decision to phase out some output cuts, combined with strong fuel supplies, has contributed to lower oil prices. However, market reactions appear to have overestimated the impact of OPEC+'s decisions, as demand indicators, while softening, have not dramatically declined.

Geopolitical Tensions

Geopolitical events also influenced market sentiment. An explosion near a merchant vessel in the Red Sea, west of the Yemeni port city of Mokha, raised concerns. The vessel was suspected to be targeted by Yemeni Houthi militants, who have attacked ships in solidarity with Palestinians in Gaza. Such incidents increase risks in the region and could potentially affect oil supply routes, adding another layer of uncertainty to the market.

Weekly Light Crude Oil Futures

Trend Indicator Analysis

The main trend is up, but momentum has shifted to the downside, following the closing price reversal top the week-ending April 12. The minor trend is down.

This chart pattern is not a change in trend, but a correction to alleviate some of the upside pressure. Furthermore, it tends to end, following a 50% to 61.8% retracement of the last rally. This puts $76.42 to $74.00 on the radar. This zone has been tested four out of five weeks and so far is representing value very well. It is essentially controlling the near-term direction of the market, offering hope for the bulls and a potential trigger point for a steep decline for the bears.

This week, the selling pressure was strong enough to take out the lower end of retracement zone. Breaking $74.00 led to a test of $72.48. However, buyers quickly saw value on the move and the market returned to $74.00 - $76.42 as of Thursday’s close.

A trade through $86.64 will signal a resumption of the uptrend. The main trend will change to down on a move through $66.19.

The minor trend will change to up on a move through $80.62. This will shift momentum to the upside, while a trade through $72.48 signals a resumption of the downtrend.

Weekly Technical Forecast

The direction of the Weekly Light Crude Oil Futures market the week-ending June 14 is likely to be determined by trader reaction to $76.42.  

Bullish Scenario

A sustained move over $76.42 will signal the presence of strong buyers. If this creates enough near-term momentum then we could see an acceleration into the minor 50% level at $79.56 and the minor top at $80.62.

Bearish Scenario

A sustained move under $76.42 will indicate the presence of sellers. This could drive prices into Fibonacci support at $74.00, followed by this week’s low at 72.48, which is a potential trigger point for an acceleration to the downside.

Bullish traders are trying to take advantage of the recent break because they view any test of $74.00 to $72.48 as value so watch for a technical bounce on new buying. Holding this area could create a rangebound trade. Look out below if $72.48 is taken out with conviction.

Market Forecast

The oil market faces potential volatility due to rising U.S. crude inventories, increased refinery activity, and geopolitical risks. While the ECB's rate cut and possible Fed rate cuts offer some support, the demand outlook remains weak.

For the upcoming week, the forecast is bearish. Economic uncertainties, higher inventories, and geopolitical tensions suggest that oil prices may face further downward pressure. Traders should remain vigilant and closely monitor these developments.

Technically, trader reaction to $76.42 - $74.00 will continue to set the tone. If value-based buying persists then we’re headed to a rangebound trade. Without it, however, the market is headed lower with $72.48 to $66.19 a near-term target.