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In this week’s shortened report, we are getting technical on WTI, before discussing the macro reasons behind its struggles and where we think crude oil is headed.

WTI creates unconfirmed bullish signals

We have seen some bullish signals on crude oil that need confirmation. Without confirmation, they are just potential bullish signals, which means caution for both the bulls and bears alike.

Source: TradingView.com

So, what sort of bullish signals have we seen?

Well, the attempted breakdown below the March 2023 low of $64.36 earlier this month was short-lived as WTI stormed back to close higher and create a hammer candle on the daily chart. I was waiting for a retest of this level from above, which we got on Monday. As per the chart, oil bounce back from that hammerhead just below the $70.00 handle, to close in the positive.

However, Monday’s recovery has stalled, and oil prices have struggle to make headway. This is hardly surprising given the weakness in data we have seen from China and Eurozone, as well as the ongoing debt-ceiling saga in the US.

So, what I would like to see next from a bullish point of view is some follow through on the upside, and a close above Monday’s range and resistance circa $71.70ish at some point this week. If this condition is met, then there will be more reason for would-be buyers to step in on the long side and short sellers to step out of the way.

Given that oil has been unable to find meaningful support on the back of the OPEC’s surprise decision to cut production, the onus is on the bulls to show up now.

The bears will remain happy and will look to increase their influence should Monday’s bullish-looking candle completely fails to signal a turnaround. If we go below Monday’s range at some point this week, then that should trigger technical selling as disappointed bulls exit their trades. In that case, a move back down to this year’s lows would become likely again.

Why have oil prices struggled?

While OPEC’s supply cuts ‘should’ keep a floor under prices, crude oil has struggled to show any meaningful strength so far.

The crude oil outlook has been hurt by demand concerns, owing to weakness in Chinese and now Eurozone data, as well as doubts about Russia complying with the OPEC+ cuts.

Russia oil exports hits post-war high

On the latter front, doubts rose further after Russia exported more oil in April than in any time since its invasion of Ukraine last year, at 8.3 million barrels per day (bpd). Apparently, nearly 80% of Russia’s crude shipments flow to China and India alone. Those findings were reported by the International Energy Agency (IEA). The IEA has also said that Russia hasn’t cut its oil production by 500,000 bpd, as per the OPEC agreement, and may even be looking to boost output further to make up for the lost revenue.

The oil market will want to hear from the OPEC+ now to confirm that the surprise agreement it formed in April is still effective.

Weak Chinese data highlights demand concerns

While China might be importing more oil from Russia and cheaper, the weakness in Chinese economic data has raised concerns about demand from the world’s second-largest economy, where the recovery appears to be fading alarmingly. We saw a much weaker-than-expected industrial production figure overnight: +5.6% y/y instead of 10.9% y/y eyed. Last week, we had benign CPI and PPI data, following a surprise 7.9% drop in imports and sluggish PMI data that was reported a couple of weeks ago.

We have also seen some rather negative data emerge from the Eurozone, suggesting that the recovery from the start of the year is starting to fade. Here, industrial production came in at -4.1% m/m compared to a smaller fall expected on Monday. There was more negative news out Tuesday as German ZEW Economic Sentiment survey printed -10.7 vs. -5.4 expected. The latest data comes after a disappointing last week when we saw weaker-than-expected German industrial production and Sentix Investor Confidence.

Clearly, the market needs evidence to prove that the drop in Chinese economic activity is just temporary. Without it, we could see commodities like oil and copper continue to struggle, like the Chinese equity markets and yuan.

US debt ceiling uncertainty hurting sentiment

Adding to demand concerns, the ongoing stalemate in the US debt ceiling talks is also negative for risk-sensitive assets, including oil. The potential for a resolution in the US debt ceiling stalemate could therefore fuel a rally in WTI and other risk assets. So, watch out for any signs of progress on this matter.

Crude oil outlook: Where do I think WTI is headed?

My crude oil outlook is still positive, and therefore think prices are headed higher – because of those OPEC cuts, for as long as the group complies. If that’s the case, I think WTI is more likely to rise to $80/$85 than fall to $60/65 from here.

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