Oil Traders Spooked By COVID Lockdowns In China

U.S. West Texas Intermediate crude oil futures are trading lower for the week while testing the key technical area that has held as support for two months. The catalysts behind this week’s selling pressure are new COVID-19 lockdown measures in China, high inflation and rising interest rates. All three events point toward lower fuel demand. Also contributing to the weak price action is the U.S. oil boom, which is helping to expand supplies incrementally.

Heading into the end of the week, the key wildcard will remain a possible revival of a 2015 Iran nuclear deal which would allow the OPEC member to boost its oil exports also weighed on prices. Additionally, French President Emmanuel Macron said on Thursday he hoped a deal would be concluded in the coming days.

China’s Zero-COVID Curbs Continue to Drive Demand Concerns

Reuters reported that Asia’s factory activity slumped in August as China’s zero-COVID curbs and cost pressures continued to hurt businesses, darkening the outlook for the region’s fragile recovery.

China’s factory activity contracted for the first time in three months in August amid weakening demand, while power shortages and fresh COVID-19 flare-ups disrupted production, a private sector survey showed on Thursday.

The unexpectedly weak reading echoed China’s official PMI released on Wednesday, which was also below the 50-point mark that separates growth from contraction on a monthly basis.

In other news, the southern Chinese tech hub Shenzhen tightened COVID curbs as cases continued to mount on Thursday, with large events and indoor entertainment suspended for three days in the city’s most populous district, Baoan.

Demand Woes Weigh after China’s Factory Activity Extends Declines

Crude oil futures turned south earlier in the week after the release of a report showing China’s factory activity extended declines in August as new COVID infections, the worst heatwaves in decades and an embattled property sector weighed on production, suggesting the economy will struggle to sustain momentum.

An economic survey showed the world’s second-largest economy is struggling to emerge from the sluggish growth seen in the June quarter, with risks darkening the outlook as high inflation and the Ukraine war hit demand.

Volatility Follows Concerns about Inadequate Supply

Recent oil volatility is being tied to concerns about inadequate supply in the 6 months following Russia’s invasion of Ukraine and as OPEC considers a production hike.

OPEC’s output hit 29.6 million barrels per day (bpd) in the most recent month, according to a Reuters survey, while U.S. output rose to 11.82 million bpd in June. Both are at their highest levels since 2000.

Nonetheless, data from the group showed the oil market will have a small surplus of just 400,000 bpd in 2022, much less than forecast earlier, according to OPEC+.

Weekly Technical Analysis

Weekly October WTI Crude Oil

Trend Indicator Analysis         

The main trend is up according to the weekly swing chart. However, momentum is trending lower. A trade through $85.37 will change the main trend to down. A move through $97.66 will signal a resumption of the uptrend.

The minor trend is down. It changed to down nine weeks ago when sellers took out the minor bottom at $97.77. This shifted momentum to the downside. The new minor top is $97.66. A trade through this price will change the minor trend to up and shift momentum to the upside.

Retracement Level Analysis

The main range is $61.08 to $115.44. The market has tested its retracement zone at $88.16 to $81.74 for five weeks in a row. 

The first minor range is $99.75 to $85.37. Its pivot is potential resistance at $92.56.

The second minor range is $108.07 to $85.37. Its 50% level at $96.72 is also resistance.

The short-term range is $115.44 to $85.37. If the minor trend changes to up then look for the rally to extent into its retracement zone at $100.41 to $103.95.

Weekly Technical Forecast

The direction of the October WTI crude oil market the week-ending September 9 will be determined by trader reaction to the main 50% level at $88.16.

Bullish Scenario

A sustained move over $88.16 will indicate the presence of buyers. If this move creates enough upside momentum then look for a rally into the first minor pivot at $92.56 and second minor pivot at $96.72.

Bearish Scenario

A sustained move under $88.16 will indicate the presence of sellers. This could lead to a test of the main bottom at $85.37 and the long-term Fibonacci level at $81.74. This price is a potential trigger point for an acceleration to the downside.

Short-Term Outlook

Technically speaking, the next major move is likely to be determined by trader reaction to the eight month retracement zone at $88.16 to $81.74. Holding above $88.16 could lead to a labored short-covering rally, while a move through $81.74 could trigger an acceleration to the downside.

Fundamentally, China is the major problem in the market at this time. Not only are traders worried about a slowing domestic economy due to lower demand from global trading partners, but they also expect problems to continue to worsen because of new COVID-19 lockdown measures in the country.

Fresh supply from Iran could accelerate the selling pressure if the country agrees to the conditions in the newly proposed nuclear deal. But OPEC+ could prevent a steep price slide if they agree to trim production. Expectations of aggressive central bank rate hikes are also expected to weigh on the market.

Trading conditions are expected to remain volatile because of the news and extremely low trading volume.

The threat of a mild recession in the U.S. is also making traders nervous, but the reality that Europe will fall into an even deeper period of slow growth is especially bearish.

It may take a major decision from OPEC+ to trim production at next week’s meeting to put a floor in the market. Otherwise, the risk to the downside will continue to grow.