U.S. West Texas Intermediate crude oil traded lower on Thursday as the U.S. Dollar soared on hawkish comments from a widely followed Federal Reserve member. Prices were already trading lower as supply disruption worries eased while rising numbers of COVID-19 cases in China added to worries over demand in the world's largest crude importer.
Demand Pressured by Stronger US Dollar
Yields rose sharply on Thursday following comments from key Fed speakers on inflation and the pace of further interest rate hikes from the central bank. St. Louis Federal Reserve President James Bullard said Thursday that interest rate hikes from the central bank have had "only limited effects" on observed inflation.
Even under a "generous" analysis of monetary policy the Federal Reserve needs to continue raising interest rates probably by at least another full percentage point, St. Louis Federal Reserve President James Bullard said, arguing that rate hikes so far "have had only limited effects on observed inflation."
Bullard said that despite aggressive actions by the Fed this year the current target policy rate of between 3.75% and 4% remains below the "sufficiently restrictive" level the Fed feels is needed to lower inflation to its 2% target, Reuters reported.
"While the policy rate has increased substantially this year, it has not yet reached a level that could be justified as sufficiently restrictive, according to this analysis, even with the generous assumptions,"…
U.S. West Texas Intermediate crude oil traded lower on Thursday as the U.S. Dollar soared on hawkish comments from a widely followed Federal Reserve member. Prices were already trading lower as supply disruption worries eased while rising numbers of COVID-19 cases in China added to worries over demand in the world's largest crude importer.
Demand Pressured by Stronger US Dollar
Yields rose sharply on Thursday following comments from key Fed speakers on inflation and the pace of further interest rate hikes from the central bank. St. Louis Federal Reserve President James Bullard said Thursday that interest rate hikes from the central bank have had "only limited effects" on observed inflation.
Even under a "generous" analysis of monetary policy the Federal Reserve needs to continue raising interest rates probably by at least another full percentage point, St. Louis Federal Reserve President James Bullard said, arguing that rate hikes so far "have had only limited effects on observed inflation."
Bullard said that despite aggressive actions by the Fed this year the current target policy rate of between 3.75% and 4% remains below the "sufficiently restrictive" level the Fed feels is needed to lower inflation to its 2% target, Reuters reported.
"While the policy rate has increased substantially this year, it has not yet reached a level that could be justified as sufficiently restrictive, according to this analysis, even with the generous assumptions," Bullard said. "To attain a sufficiently restrictive level, the policy rate will need to be increased further."
The jump in Treasury yields drove up the U.S. Dollar, limiting foreign demand for dollar-denominated crude oil.
Tensions Ease in Europe
Worries about a supply disruption subsided after Poland and NATO said a missile that crashed inside NATO member Poland was probably a stray fired by Ukraine's air defenses and not a Russian strike, easing fears of the war between Russia and Ukraine spilling across the border.
COVID Restrictions Weigh on Chinese Consumption
Worries over weak demand in China also weighed on prices after the country reported rising daily COVID-19 infections.
The major bearish event was Chinese refiners asking Saudi Arabia to reduce crude volume in December. This is a sign of struggling Chinese consumption. Furthermore, the country is also slowing its Russian crude purchases.
OPEC Sees Lower Demand Ahead
OPEC on Monday cut its forecast for 2022 global oil demand growth for the fifth time since April and further trimmed next year's figure, citing mounting economic challenges including high inflation and rising interest rates.
Glimmer of Hope for Bullish Traders
Oil gained some support on Wednesday after U.S. government officials said U.S. crude stocks fell by a bigger than expected 5 million barrels in the most recent week.
Other potentially bullish factors include the OPEC+ output cuts and the European Union's planned embargo of Russian crude oil.
In October, OPEC and its allies, known as OPEC+, decided to lower targeted production and OPEC's de-facto leader Saudi Arabia said the cut of 2 million bpd was necessary to respond to rising interest rates in the West and a weaker global economy.
Weekly Technical Analysis
Weekly January WTI Crude Oil
Trend Indicator Analysis
The main trend is down according to the weekly swing chart. A move through $92.53 will change the main trend to up. A trade through $74.96 will signal the resumption of the downtrend.
The minor trend is up. A trade through the minor bottom at $80.49 will change the minor trend to down. This will also shift momentum to the downside.
Retracement Level Analysis
The short-term range is $108.63 to $74.96. Its retracement zone at $91.80 to $95.77 is resistance. It stopped the rally last week at $93.74.
The main range is $60.23 to $108.63. The market is currently testing its retracement zone at $84.43 to $78.72. This is a potential support area.
The contract range is $35.98 to $108.63. Its retracement zone at $72.31 to $63.73 is the next major downside target and value zone.
Weekly Technical Forecast
The direction of the January WTI crude oil market the week-ending November 25 is likely to be determined by trader reaction to the 50% level at $84.43.
Bullish Scenario
A sustained move over $84.43 will signal the presence of buyers. This could lead to a retest of the retracement zone at $91.80 to 97.77. The latter is a potential trigger point for an acceleration to the upside.
Bearish Scenario
A sustained move under $84.43 will indicate the selling pressure is getting stronger. This could trigger an acceleration into the Fibonacci level at $78.72. This is the last support before the main bottom at $74.96. Taking out this level will signal a resumption of the downtrend with the retracement zone at $72.31 to $63.73 the next major target.
Short-Term Outlook
Crude oil is likely to remain under pressure ahead of next week's holiday-shortened week because of ongoing concerns about demand, the dollar's renewed strength and worries about a global recession.
Earlier in the week, OPEC said in a report, "The world economy has entered a period of significant uncertainty and rising challenges in the fourth quarter of 2022."
"Downside risks include high inflation, monetary tightening by major central banks, high sovereign debt levels in many regions, tightening labor markets, and persisting supply chain constraints."
On Thursday, United Kingdom officials confirmed the economy is in recession. A recession is expected in the Euro Zone and China appears to be on the brink of recession. Economists are also warning that the Federal Reserve may be only one or two interest rate hikes away from triggering a recession in the United States.
Combined with the bearish outlook, the price action suggests that traders have shifted into "sell the rally" mode. Technically, prices may have to test $72.31 to $63.73 before the major buyers return.