Image Source: Unsplash
 

It’s been a much better week for crude bulls with crude futures rallying around 9% off initial lows on the week. These moves will no doubt be cheered by bulls on the back of the roughly 12% decline we saw from YTD highs. In all, it’s been a volatile, if directionless, year so far for crude, reflecting the opposing forces gripping the market currently, making it difficult for traders to establish a strong view in either direction.
 

Softer Fed Expectations Supporting Oil

A weaker USD and softer Fed rate hike expectations are one of the main supporting factors for crude currently. With the Fed having pivoted on rates twice now and with Powell acknowledging that disinflation is underway in the US, traders are starting to look for a likely end date to easing. While the Fed has been quick to reaffirm its view that rate hikes will continue until next year, market pricing shows traders are looking for a pause as early as the summer. Indeed, ahead of last week’s dazzling US labour data, traders had begun pricing in a cut ahead of year-end.
 

Uncertainty Remains

Still, there is uncertainty there. Last week’s labour data shows that the Fed still has room to push more aggressively with rates if it chooses to. While Powell was not overly hawkish in comments earlier this week, we heard more aggressive signalling from other members of the Fed yesterday showing that there is support there for continuing with rate hikes through the year.
 

Chinese Demand Outlook Improving

Another factor helping support oil prices currently is the improving demand outlook in China. The reopening of the Chinese borders this year is projected to feed into much higher demand through the year as the country moves beyond its covid problem and trade, industry and travel all pickup. Recent data from China, the second largest global consumer of oil, has pointed to improving activity which, if it continues, should be good news for oil bulls.
 

Weaker US Demand an Issue – EIA Inventories Rise Again

However, US demand remains a key challenge. Recent industry data has shown falling demand in the US as a strengthening trend which is raising questions for oil traders. This week, the EIA reported a further build in US crude stores of 2.4 million barrels, above market forecasts. Despite falling demand US crude production ramped higher again last week, now back at its highest levels since early 2020, which is having a subduing impact on prices. Looking ahead, choppy action in oil prices looks likely to continue until we get a clear resolution one way or the other.
 

Technical Views

Crude Oil

(Click on image to enlarge)

The market has turned higher once off again off the latest 72.61 level. Prices have been caught since early December in a range between support along that level and resistance at 81.40. Momentum studies are turning higher here putting the focus on an upside break for now. If the bulls can clear the range highs, 85.53 will be the next hurdle to watch. 

More By This Author: