Momentum Grows For Oil, But Recession Fears Cap Gains

U.S. West Texas Intermediate crude oil futures settled about 2% higher on Thursday on positive U.S. economic data and optimism that global demand will strengthen as top oil importer China reopens its economy. The move pushed futures prices higher for the week and in a position to add to the current rally. Renewed buying by the major hedge funds is also a bullish sign.

Better-than-Expected US Economic Data Providing Support

Gross Domestic Product increased at a 2.9% annualized rate in the fourth quarter of 2022 as consumers boosted spending on goods, the Commerce Department said. But momentum rapidly slowed toward the year’s end, as rising interest rates eroded demand.

Growth in personal consumption expenditures slowed to 2.1% on an annualized basis from 2.3% in the prior quarter and the GDP price index, another inflation measure, decelerated to 3.5%.

A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits dropped 6,000 to a seasonally adjusted 186,000 for the week ended Jan. 21. The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 20,000 to 1.675 million for the week ended Jan. 14.

Another report released by the Commerce Department on Thursday showed new orders for U.S. manufactured durable goods soared by much more than expected in the month of December.

The Commerce Department said durable goods orders spiked by 5.6 percent in December after tumbling by 1.7 percent in November.

Economists had expected durable goods orders to surge by 2.5 percent compared to the 2.1 percent slump that had been reported for the previous month.

Oil Traders Betting Fed Can Produce ‘Soft-Landing’

With some investors saying the economic data suggests there is more resilience in the economy than is being talked about, some are already calling it a “goldilocks situation.”

In other words, investors see the economy as decelerating, but not falling off a cliff as many had anticipated just weeks ago.

What this means is that investors now feel the Fed may be able to pull off a ‘soft-landing’ if there is a recession. We feel that oil prices can surge if the fear of recession is dampened or eliminated.

Weekly Technical Analysis

Weekly March WTI Crude Oil

Trend Indicator Analysis              

The main trend is down according to the weekly swing chart. However, momentum is trending higher.

A move through $89.89 will change the main trend to up. Taking out the main top at $91.44 will reaffirm the uptrend. A trade through $61.25 will reaffirm the downtrend.

The minor trend is up. A trade through $83.14 will reaffirm the minor trend. A move through $72.74 will change the minor trend to down.

Retracement Level Analysis

The contract range is $40.25 to $104.90. Its retracement zone at $72.58 to $64.95 is the next major downside target and value zone.

The main range is $61.25 to $104.90. The market is currently trading inside its retracement zone at $83.08 to $77.92.

The short-term range is $104.90 to $70.56. Its retracement zone at $87.73 to $91.78 is a major upside target area.

Weekly Technical Forecast

The direction of the March WTI crude oil market the week-ending February 3 is likely to be determined by trader reaction to the main 50% level at $83.08.

Bullish Scenario

A sustained move over $83.08 will signal the presence of buyers. Taking out the minor top at $83.14 could create the momentum needed to fuel a surge into the short-term retracement zone at $87.73 to $91.78.

Bearish Scenario

A sustained move under $83.08 will indicate the presence of sellers. If this move creates enough downside momentum then look for a test of $77.92. If this level fails then look for the selling to possibly extend into $72.58.

Short-Term Outlook

Oil prices remain caught in a trap created by fears of a possible U.S. recession and optimism over China’s demand outlook. One of those fears may have eased a little on Thursday with the release of the stronger than expected U.S. Fourth-Quarter GDP report.

It’s difficult at this time to forecast China demand. And with this week’s Lunar New Year holiday, predicting near-term demand may have be a little more difficult or at least delayed. Fuel demand for travel may have risen but we won’t be sure about factory demand for a few weeks.

Opening up the economy will be one way for China to solve the global demand issue, but those gains could be limited if there is a global recession.

Prices could remain rangebound over the next 3 to 6 months if analysts can’t get a firm grip on future demand, especially from China. It’s still the “big unknown”.

However, the futures market price action continues to indicate oil traders are betting the U.S. Fed can deliver a “soft-landing.”

Although momentum has shifted to the upside on the weekly chart, there is still a ways to go before the trend changes to up. We’re not expecting to see a change in trend until traders can determine the Fed’s end game. And that may be revealed at next week’s Jan. 31 – Feb. 1 policy meeting.

Adding further support to bullish investor sentiment is the impressive return of the hedge funds. Because, after all, there cannot be a bull market without major buyers in the game.

Technically speaking, with a bullish bias created by the strong, supportive fundamentals, we’d like to see a sustained breakout over $83.14 to confirm the shift in sentiment.