Are Oil Bulls Being Overly Confident?

US benchmark October West Texas Intermediate (WTI) crude oil showcased mixed signals on Thursday. While prices settled lower on the daily chart, the market is still in a position to close higher for the week. Driving this sentiment are both domestic monetary policies and international market dynamics.

Supporting Factors

Fed's Rate Hiking Cycle

The recently released U.S. consumer prices data for July has ignited speculation surrounding the Federal Reserve's monetary stance. Market analysts are hypothesizing that the Fed might be concluding its aggressive rate-hiking phase. Such a move is expected to bolster commodities like oil.

OPEC's Positive Outlook and Production Cuts

The Organization of the Petroleum Exporting Countries (OPEC) released a report affirming their bullish outlook on the oil market. They anticipate a thriving oil market for the rest of the year, and their projections extend into 2024 with expectations of a surge in oil demand.

This optimistic view is further fueled by Saudi Arabia and Russia's recent decision to extend their output cuts. Additionally, there's an undercurrent of geopolitical tension – especially potential conflicts involving Russia and Ukraine in the Black Sea region – which poses threats to Russian oil shipments and inadvertently bolsters oil prices.

Inventory Dynamics

Despite the recent addition of a whopping 5.85 million barrels to U.S. crude stocks, the market response was unexpectedly muted. The previous week had witnessed a significant drawdown, leaving the net inventory at a precarious balance. As a result, gasoline stock levels are soaring, touching peaks not seen since Russia's invasion of Ukraine. Analysts are monitoring these levels, and some predict further elevations, especially if adverse weather patterns, like hurricanes induced by the heated Atlantic Ocean, strike the Gulf of Mexico and halt refinery operations.

Challenges Ahead

On the flip side, the global economic scene provides some cause for concern. China, the world's second-largest economy, is flashing red signals. Recent statistics unveil a worrying trend of deflation in its consumer sector, accompanied by a persistent dip in factory gate prices. These downward spirals spell potential trouble for fuel demand on a global scale. The U.S.'s strategic move to limit certain tech investments in China, especially in pivotal sectors like computer chips, could further suppress China's economic momentum.

Weekly Technical Analysis

Weekly October WTI Crude Oil

Trend Indicator Analysis             

The main trend is up according to the weekly swing chart. A trade through $85.03 will reaffirm the uptrend. The main trend will change to down if sellers take out the swing bottom at $64.42.  

Retracement Level Analysis

The contract range is $37.88 to $95.40. Its retracement zone at $66.64 to 59.85 is the major support.

The intermediate range is $95.40 to $64.42. The market is currently testing its retracement zone at $79.91 to $83.57.  Overtaking the upper level at $83.57 will indicate the buying is getting stronger. A break back under $79.91 won’t change the trend, but it will be a sign of weakness, probably profit-taking.  

The minor range is $64.42 to $84.16. Its retracement zone support is $74.29 to $71.96.

Weekly Technical Forecast

The direction of the October WTI crude oil market the week-ending August 18 is likely to be determined by trader reaction to the intermediate 61.8% level at $83.57.

Bullish Scenario

A sustained move over $83.57 will signal the presence of aggressive buyers. This could create the momentum needed to take out the next main top at $85.03. This is a potential trigger point for an acceleration to the upside with $95.40 the next major target price.

Bearish Scenario

A sustained move under $83.57 will indicate the presence of sellers. This could trigger a quick pullback into the intermediate 50% level at $79.91.

If this creates enough downside momentum to take out $79.91, then look for the selling to possibly extend into the minor retracement zone at $74.29 to $71.96.

Short-term Forecast

The immediate future of the WTI crude oil market seems to be hanging in a balance. While OPEC's buoyant projections and geopolitical tensions offer a bullish tilt, looming threats like potential hurricanes and China's economic slowdown could swing it the other way. Investors would do well to tread cautiously, keeping an eye on both domestic and international indicators.

Technically, we can see a similar pattern developing on the weekly chart with the market trading inside the 50% to 61.8% retracement zone of its June 2022 high and its March 23 low. This area is a natural resistance zone that could be strong enough to stop the current rally.

If bearish news begins to dominate the headlines, especially from China, then look for a break under $79.91 to trigger the start of a meaningful correction into possibly $74.29 to $71.96.

If the news is bullish enough to offset concerns over China demand then look for a potential breakout over $85.03 with plenty of room to the upside.

Traders should work the long-side cautiously, however, because prices are a little overextended at current levels, and the market is becoming highly sensitive to negative news out of China.