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Crude oil prices have struggled to in the last few weeks to show any clear bullish signs despite raised geopolitical tensions in Europe concerning Russia. It looks like investor concerns about supply remain the main issue for prices, as the risk of a fresh breakdown grows amid rising OPEC+ supplies and weak demand.

Supply glut means risks remain titled to downside for prices

Many oil forecasting agencies such as the International Energy Agency (IEA) have rung the alarm bell with their latest forecasts, putting a negative outlook on oil prices. The IEA itself thinks that a record surplus of 3.3 million barrels a day by 2026 is upon us. The US Energy Information Administration (EIA) echoes the concern, projecting an oversupply of 2.1mn b/d in the second half of this year and 1.7mn b/d in 2026. Many other oil forecasts are also expecting increases supplies. 

The key question here is that whether the supply glut will be met with increased demand growth. Obviously, times are a lot different to the pandemic era when demand was collapsing as the glut was increasing due to the lockdowns. Still, the excessive supplies should keep pressure on prices until something gives. 

But according to a report in the FT, much of the excess crude has ended up in Asia or floating storage, rather than visible hubs like Cushing or Rotterdam. China, in particular, has been stockpiling at a staggering pace, potentially to suggest Beijing may be fortifying its reserves against the risk of harsher sanctions to reduce vulnerability in a trade war.

So, demand at least from China has remained strong, which, alongside Western sanctions on Russia and Venezuela, have kept the downside limited for oil prices. Another supportive factor could be the weakening US dollar, with the dollar index dropping last week to its lowest levels since 2022, before taking an oversold bounce.

But if the glut continues to increase then prices could break lower more meaningfully despite a weaker US dollar. After all, the IEA sees global demand growth slowing sharply — only 700,000 b/d next year, the weakest outside the pandemic since 2009. If their projections turn out to be correct, then the balance will clearly tilts towards surplus.

So, keep a close eye on inventories. If they start showing up in visible storage, concerns about excessive supply will come to the forefront and lead to a sharp oil price drop.

Crude oil technical analysis and trade ideas

From a technical point of view, the path of least resistance on oil continues to remain to the downside given the overall bearish price structure. Indeed, with price holding below both the 21 and 200 day moving averages, this is a non-subjective way of determining both the long and short term trends.Against this backdrop, looking for bearish setups near resistance makes more sense than trying to catch the bottom near support. Until something changes to trigger a technical reversal signal, extra caution should be taken with any long setups. In any case, traders may wish to proceed level to level when the trend is not strong.

So, it looks like the WTI future could be heading further lower in the short-term outlook. With prices trading inside what looks to be a triangle continuation pattern, break below the $62.00 support level looks increasing likely. If that happens, then we could see oil futures revisiting the psychologically important $60.00 level again and may even go on to dip towards the April lows of around $55. But let’s see first if prices will break below $62.00 and if so, the immediate target will be $60.00. How WTI behaves near $60 (should it get there) then that could give us strong indications whether we will see another $5 or so drop.

In terms of resistance levels to watch, well the initial one is at $63.00, but it is the area between $63.64 to $65.27 that is a more significant zone. Here, oil prices had bottomed in May 2023 and September 2024. The fact that prices have broken back below this zone is far from idea from a bullish point of view. The recent breakdown below this critical juncture took place in early August and since then prices have struggled to climb back above it.  

As things stand therefore, only a break back above the $63.64 to $65.27 area would tip the balance back in bulls’ favour. Unless that happens, I would continue looking for more downside in the short-term outlook. 

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