Oil Prices Surge on Falling Inventories and Rising Geopolitical Tensions

Oil futures have surged sharply this week, driven by a significant draw in U.S. crude inventories and signs of a cooling job market that have fueled hopes of a potential Federal Reserve rate cut. Lower interest rates could bolster oil prices, which have been under pressure due to tepid global demand.

EIA Report Fuels Price Increase

The U.S. Energy Information Administration (EIA) reported a notable decline in crude inventories, which fell by 2.5 million barrels to 457.1 million barrels for the week ending June 14. This drawdown exceeded analysts' expectations of a 2.2 million-barrel decline. Additionally, U.S. gasoline stocks dropped by 2.3 million barrels, surpassing predictions of a 600,000-barrel build. Distillate stockpiles, including diesel and heating oil, also decreased by 1.7 million barrels against an anticipated rise of 300,000 barrels. This comprehensive reduction in inventories has significantly contributed to the bullish sentiment in the oil market.

Cooling Job Market and Federal Reserve Influence

Recent economic data has shown signs of a slowing U.S. job market, adding to the speculation that the Federal Reserve might cut interest rates to stimulate economic activity. The number of Americans filing for unemployment benefits increased more than expected to 229,000 for the week ending June 1, higher than the forecasted 220,000 claims. The Federal Reserve has maintained its benchmark rate in the 5.25% to 5.50% range, but recent comments from officials indicate a potential rate reduction could be on the horizon. Lower interest rates would likely spur economic growth and increase oil demand, providing further support for prices.

Geopolitical Risks Add to Bullish Sentiment

Geopolitical tensions have also played a crucial role in driving oil prices higher. A Ukrainian drone strike on a Russian oil terminal in the port of Azov caused a significant fire, highlighting the vulnerability of Russian energy infrastructure. This incident underscores the ongoing risk to global oil supply from geopolitical conflicts. Additionally, escalating tensions in the Middle East, particularly between Israel and Hezbollah, have contributed to the growing geopolitical risk premium in oil prices. Israeli military actions in Gaza and the possibility of a broader conflict with Hezbollah are adding to market jitters.

Weekly Light Crude Oil Futures

Trend Indicator Analysis

The main trend is up. Momentum shifted to the upside this week when buyers took out the minor top at $80.22. It had been trending lower since the closing price reversal top the week-ending April 12. The minor trend is down.

The near-term retracement zone at $76.02 to $73.60 is solid support, having been successfully tested two out of the last three weeks. 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.

The new minor range is $86.24 to $72.08. The market is currently trading on the strong side of its pivot at $79.16.

A trade through $86.24 will signal a resumption of the long-term uptrend. The main trend will change to down on a move through $72.08.

Weekly Technical Forecast

The direction of the Weekly Light Crude Oil Futures market the week-ending June 28 is likely to be determined by trader reaction to $79.16.  

Bullish Scenario

A sustained move over $79.16 will signal the presence of strong buyers. If this creates enough near-term momentum then we could see a further acceleration to the upside with $86.24 the initial target price.

Bearish Scenario

A sustained move under $76.16 will indicate the presence of sellers. If it generates enough downside momentum then look for the selling pressure to extend into the major support zone at $76.02 to $73.60.  

Short-Term Forecast: Bullish

Looking ahead, the combination of falling inventories, potential Federal Reserve rate cuts, and escalating geopolitical risks suggest a bullish outlook for oil prices. Analysts at JPMorgan have noted that a summer uptick in oil demand, coupled with extended production cuts by the OPEC+ group, should lead to tighter oil balances and further inventory drawdowns in the coming months.

Given these factors, traders can expect oil prices to remain supported in the short term, with the potential for further gains if geopolitical tensions continue to escalate or if the Federal Reserve signals an imminent rate cut.

Technically speaking, solid support at $76.02 to $73.60 should help sustain a long-term rally. Short-term, however, the key support level is $79.16. A sustained move over this level will help drive the upside momentum next week.

The weekly chart indicates that with enough buying volume, the market will have a clean short at $86.34 over the near-term.