WTI crude oil prices tend to be bearish, which may be the second consecutive week of decline in oil prices; EIA inventories rose for the sixth consecutive week, and the backlog of inventories is worrying; the market’s optimism about China’s crude oil demand may be dissipating.
Outlook for WTI Crude Oil Fundamentals
Oil prices have struggled this week despite broad dollar weakness for much of the week. WTI crude oil prices hit a three-week low yesterday and are on track for a second week of losses in a row given the looming sanctions on Russian oil products.
There are a number of reasons why oil prices could fall this week. U.S. crude oil inventories rose to the highest level since June 2021, and data from the Energy Information Administration also showed a build in inventories of petroleum products. EIA crude oil inventories rose by 41,400 barrels last week, compared with the previous forecast of 0.376 million barrels.
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Oil inventories continue to build as China reopens, while optimism around demand remains unconfirmed. The manufacturing PMI released by the National Bureau of Statistics of China this week was above 50, while the Caixin manufacturing PMI was 49.2, which failed to meet expectations and was still in the contraction range. However, the later Caixin Composite PMI came in at 51.1, up from 48.3 in the previous month. Looking ahead, we still need to see continued improvement in China’s economic data before it may provide new support for oil prices.
At this week’s OPEC+ meeting, OPEC’s Joint Ministerial Monitoring Committee (JMMC) recommended keeping output steady even as Chinese demand has yet to materialize. Its members agreed that keeping the current agreement in place until the end of 2023 should help maintain market stability. The current OPEC chairman Lima said that OPEC must be cautious about any decision; Secretary-General Ghaith is still cautiously optimistic about the global economic recovery.
The dollar weakened after this week’s Fed rate decision. Fed Chairman Jerome Powell’s use of the word “deflation” seemed to give risk assets some boost. Positive sentiment towards risky assets likely contributed to the decline in oil prices; market participants have resumed piling into stocks, while many stock indexes have not fully recovered from the 2022 rout.
Later today, the US will release the non-farm payrolls report, which may have an impact on the market. Among them, the hourly wage data is also the key to beating inflation.
Chart source: DailyFX Economic Calendar
Technical Outlook for WTI Crude Oil
From a technical standpoint, WTI is in the process of falling for a second week. On the daily time frame, oil prices have turned bearish, having previously settled below swing highs around $79 a barrel. We have since found some support above the $75/barrel mark. A key support area is around $73, and a close below that level could see a retest of the 2022 low at $70.
Conversely, if WTI crude oil prices start to rise, the resistance may be at the 50-day moving average at $77.50, followed by the 100-day moving average at $81.45.
WTI crude oil daily chart: February 3, 2022
Chart source: TradingView
IG Client Sentiment: Bearish
IGCS shows that retail investors are currently bullish on crude oil, with 79% of investors currently holding net long positions. The retail sentiment index is often considered a contrarian indicator, and the fact that retail investors are net long suggests that crude oil could continue to fall. (Translated by Ashley by Zain Vawda)
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