Why Oil Prices Rallied This Week

Crude oil is in a position to close higher for the week after posting a dramatic turnaround following last week’s sell-off, with prices surging by approximately 4%. The market was influenced by various factors, including escalating Middle East tensions, unexpected trends in U.S. fuel stocks, and developments in Russian oil exports. Brent crude breached the $80 per barrel mark, while WTI climbed above $75, a notable movement for the first time in February.

Middle East Tensions Heighten Supply Concerns

Central to this week’s market fluctuations is the escalating tension in the Middle East. Israel’s rejection of a ceasefire offer from Hamas heightened fears of a broader conflict, critically impacting the oil-rich region. The situation intensified with Israeli forces bombing the southern border city of Rafah, stirring market apprehensions about potential disruptions in one of the world's key oil-producing regions. Such geopolitical unrest is a classic trigger for oil price hikes, as traders anticipate potential supply chain disruptions.

US Refinery Trends and Inventory Shifts

In the U.S., the oil market received additional support from a stronger-than-expected drawdown in gasoline and middle-distillate stocks. This decline in fuel reserves, paired with a rise in crude stocks, indicates a tightening in refining capacity due to ongoing maintenance. The United States, being a significant consumer and producer of oil, sees such inventory trends directly influencing global oil prices. The constrained refining capacity, along with Europe’s diesel shortage, suggests a bullish undercurrent for oil prices.

Russia's Export Increases and OPEC+ Considerations

Adding complexity to the market is Russia’s unexpected increase in crude exports. Technical outages and damage to refineries led to this unplanned hike, potentially undermining Russia's commitment to the OPEC+ supply cut agreement. This development raises questions about the future of the OPEC+ pact and Russia’s adherence to it, injecting uncertainty and a bullish sentiment into the market.

Global Demand Outlook

On the demand side, signs of robust health in major oil-consuming nations, notably India and the U.S., underpin the bullish sentiment. U.S. job market strength, evidenced by lower-than-expected jobless claims, suggests sustained oil consumption. Additionally, steady production from Norway's Johan Sverdrup oilfield, at a rate of 755,000 barrels per day, aligns with this demand outlook.

U.S. Dollar’s Influence

The oil market also pays close attention to the U.S. Dollar, as its strength influences dollar-denominated crude oil prices. A resilient U.S. labor market implies that the Federal Reserve may not cut interest rates soon, maintaining the dollar's strength. This scenario can make oil more expensive in other currencies, potentially impacting global demand.

Weekly Technical Analysis

Weekly March WTI Crude Oil

Trend Indicator Analysis

The main trend is down according to the weekly swing chart, but the minor trend is up. This divergence is helping to create the two-sided price action. We essentially have the short-term traders reacting to a volatile news situation, while the longer-term traders are capping gains by selling rallies based on their interpretation of the fundamentals.

There was one major change this week. A trade through $79.29 will now change the main trend to up. This replaces $86.28, which had been in place since September. A move through $68.28 will signal a resumption of the downtrend.

Retracement Level Analysis

The contract range is $38.76 to $90.14. Its retracement zone at $64.52 to $58.46 is the major support zone. This area stopped the selling the week-ending March 24, 2023 at $63.92 and the week-ending May 5, 2023 at $63.00. This is a major long-term value zone.

The intermediate range is $41.52 to $90.14. Its retracement zone at $65.83 to $60.09 is additional support.

A second intermediate range is $58.99 to $90.14. Its retracement zone is $74.57 to $70.89. The selling stopped this week inside this zone at $71.41.

The minor range is $90.14 to $63.00. Its retracement zone at $76.57 to $79.77. This zone stopped the rally at $79.29 on January 29.

Weekly Technical Forecast

The direction of the March WTI crude oil market the week-ending February 16 is likely to be determined by trader reaction to the intermediate 50% levels at $74.57 and $76.57.

Bullish Scenario

A sustained move over $76.57 will signal the presence of strong counter-trend buyers. If this creates enough near-term momentum then look for the counter-trend rally to continue into the main top at $79.29 and the intermediate 61.8% retracement level at $79.77. The latter price is both potential resistance and a trigger point for an acceleration to the upside.

Bearish Scenario

A sustained move under $74.57 will indicate the presence of sellers. This could drive the market into 61.8% support at $70.89, followed by the main bottom at $68.28.

Rangebound Possibilities

Brace yourself for another round of rangebound trading if $70.89 holds as support and $79.77 holds as resistance. The price action would create a balance zone or “sweet spot” for traders between $76.57 and $74.57.

Short-Term Market Forecast

Looking ahead, the market sentiment for crude oil leans towards the bullish. The geopolitical strife in the Middle East, particularly the situation in Gaza, presents a significant risk to oil supply stability. The constrained refining capacity in the U.S., coupled with Russia’s unexpected export increase, further bolsters this bullish outlook.

The market is also closely monitoring the developments in Gaza, where a humanitarian crisis looms with potential for further escalation. Israeli operations in Rafah and the rejection of Hamas' ceasefire proposal by Prime Minister Netanyahu add layers of complexity and uncertainty to the situation, potentially affecting the oil supply chain.

Moreover, the global demand outlook remains healthy, supported by strong indicators from major oil-consuming nations. The U.S. job market's resilience, coupled with sustained production levels in significant oil fields, point towards continued demand.

However, this bullish outlook is tempered by the evolving considerations of the OPEC+ alliance and the potential for increased Russian exports. The market remains sensitive to any shifts in OPEC+ strategies or compliance levels, as these could significantly impact future supply scenarios.

In conclusion, while the market navigates through these multifaceted factors, the prevailing sentiment for the short-term future of crude oil prices is bullish. The combination of geopolitical tensions, inventory trends, global demand signals, and OPEC+ considerations creates a scenario where upward price movement is the more likely outcome in the near term, barring any unexpected developments.