The Israeli conflict complexes oil fundamentals. The key factors driving WTI prices were:
- Bullish factors: Strong global economic growth and geopolitical tensions in the Middle East.
- Bearish factors: Rising US oil production and concerns about a global economic slowdown.
The outlook for WTI prices is mixed. Bullish factors could support prices, but bearish factors could weigh on prices.
On a technical basis, WTI is currently trading in a consolidation range between $90 and $100 per barrel. A break above $100 could signal a further upside move, while a break below $90 could signal a further downside move.
Investors should carefully monitor both the fundamental and technical factors before making any investment decisions.
The bear’s hesitation
WTI prices started to stabilize late in the American session on Friday due to technical reasons, as the downward movement of WTI prices began to seem overextended. Even a strong NFP report, which implied a relatively tight US employment market, failed to support the US dollar or weigh on oil prices.
This suggests that oil bears may be hesitant to continue pushing prices lower, and that there may be some support for oil prices at current levels.
Overall, the outlook for oil prices is still mixed, but the stabilization in prices on Friday provides a glimmer of hope for oil bulls.
Monday’s positive gap
In the early hours of Saturday, a dramatic incursion by Hamas into Israeli territory occurred, sending shockwaves around the globe and causing significant concern in the oil market. The apprehension of the crisis escalating to an international level, with the potential involvement of other Arab nations in the conflict, understandably heightened market fears of further constriction on the supply side of the global oil market. Consequently, at the start of trading on Monday, there was a substantial surge in oil demand that drove oil prices up by more than $3 per barrel. This allowed WTI prices to stabilize around $84.50 per barrel for the following few days.
Oil: Saudi Arabia’s pledge
Concerns about a potential further tightening of the global oil market’s supply side began to ease on Wednesday. This effectively allowed oil prices to fall, settling just above the closing level from the previous Friday. Analysts often point to Saudi Arabia’s commitment to stabilising the oil market as the primary reason for this decline. However, it’s worth noting that Russia also appears to be contributing to this effort. But given the sanctions imposed on Russian oil, its impact may be limited. The main focus remains on Saudi Arabia due to its geographical and cultural proximity to the Palestinians, its status as the leading OPEC oil producer, and its reduced production levels.
The slack in the US oil market
The decline in oil prices on Wednesday may have also been influenced by the release of the American Petroleum Institute’s (API) weekly US crude oil inventory report. The report indicated a rise in US oil inventories by 12.94 million barrels. The Energy Information Administration (EIA) is also anticipated to report an increase, albeit a smaller one. If the EIA also reports an increase in US oil inventories, it would suggest that demand has not kept pace with production levels. This could indicate a slack in the US oil market, which could exert some downward pressure on West Texas Intermediate (WTI) prices.
Thursday’s jump
In today’s European trading session, it was observed that the prices of both Brent and WTI crude oil increased concurrently. This coincided with OPEC maintaining its prediction for strong global oil demand, with consumption projected at 2.44 million barrels per day (bpd) in 2023, and slightly lower at 2.25 million bpd in the following year. However, it’s important to note that OPEC’s forecasts are somewhat at odds with those of the EIA, which anticipates a decrease in oil demand next year due to deteriorating conditions in China, India, and Brazil. Additionally, the German government is currently predicting a 0.4% contraction in its economy this year, implying a recession. This situation could be seen as representative of Europe as a whole and may potentially impact oil demand.
The oil way ahead
At present, the international oil market is in a state of considerable fragility. The fundamental factors that typically influence the oil market have grown more complicated due to the conflict in Israel, and the market continues to closely monitor the situation and its potential impact on oil prices. We maintain that a potential escalation of the conflict in Israel, particularly if neighbouring Arab countries become involved either directly or indirectly, could drive oil prices higher as concerns about the supply side of oil are likely to intensify. On the demand side, any indications of increased economic activity in China could lend some support to oil prices, and vice versa. Additionally, it’s worth noting that a restrictive financial environment in various countries could negatively affect economic activity and put downward pressure on oil demand.
Oil: Technical Analysis
From a technical perspective, we observed that the price action of West Texas Intermediate (WTI) rebounded from the $81.60 (S1) support line during today’s European trading session. Given that the downward trendline guiding the commodity’s price action was breached on Friday, 9th of the month, and the current inability of WTI’s price action to break the $81.60 (S1) support line, coupled with the Relative Strength Index (RSI) indicator nearing a reading of 50, we tend to maintain a bias for a sideways movement for now, although the overall situation appears to be unstable.
If the bulls manage to gain an upper hand, we could see WTI’s price breaking the $84.50 (R1) resistance line and potentially even breaching the $87.50 (R2) resistance level. On the other hand, if the bears regain control, we could see WTI’s price breaking through the $81.60 (S1) support base, with the next possible target for the bears being the $76.00 (S2) support level – a level that hasn’t seen any price action since it was last breached on July 24th.
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