Oil Price Forecast: Investors Cautious Ahead of US Inflation Figures

Oil Highlights

• WTI oil prices down as traders cautious before US inflation figures
• April’s US consumer price index crucial to Fed’s interest rate decision
• Investors anticipate insight into future US central bank policies

Oil Overview

WTI crude oil prices are slightly lower on Tuesday and trading in a tight range. Despite the strong gains from the previous two sessions, the price action suggests traders are showing signs of caution. This could be attributed to investors exercising prudence ahead of the release of U.S. inflation figures for April, which are crucial to the Federal Reserve’s next interest rate decision.

At 06:10 GMT, WTI Oil is trading $72.60, down $0.38 or -0.52%. On Monday, the United States Oil Fund ETF (USO) settled at $64.27, up $1.24 or +1.97%.

US Inflation Data Awaited for Fed Insights

Investors are eagerly anticipating the release of the April U.S. consumer price inflation figures on Wednesday. The widely followed measure of inflation, the U.S. consumer price index, is expected to have risen 5% YoY and 0.4% MoM, according to a poll of economists by Dow Jones.

The market is closely watching these figures for insights into the future interest rate policies of the U.S. central bank. Currently, the CME Group’s FedWatch tool indicates that traders are pricing in only a 13.1% probability of a 25 basis-point rate hike next month. Investors will be scrutinizing the report for any indications of the Federal Reserve’s next policy moves.

Last week, the Federal Reserve increased interest rates, potentially marking the conclusion of its tightening cycle. In response to easing inflationary pressure, the central bank eliminated guidance regarding the need for future hikes.

According to a report released on Monday, U.S. consumers anticipated slightly lower inflation in a year’s time compared to the previous month.

Prices Rebound as Job Market Strengthens

Oil markets experienced significant declines last week. However, prices rebounded on Friday and Monday due to a decrease in concerns over a recession in the United States, the largest oil consumer in the world. This decrease in fears came after the U.S. added 253,000 nonfarm payrolls in April, surpassing Wall Street’s expectation of 180,000. Additionally, the unemployment rate was reported at 3.4%, below the expected 3.6%.

However, this strong job market suggests that the Federal Reserve may be less likely to halt its aggressive tightening campaign, which is a policy shift that some on Wall Street had been hoping for. This could cap oil prices.

Traders View Crude Decline Excessive

Furthermore, a few traders viewed crude’s three-week decline over concerns of weak demand as excessive. The oil market was significantly oversold and it is likely to regain stability as long as Wall Street retains confidence that the Federal Reserve will decrease interest rates later this year.

OPEC+ Output Cuts Support Oil Prices

Aside from the concerns of weak demand, there are other factors that are contributing to the movement of oil prices. Firstly, a round of voluntary output cuts by some members of OPEC+ is set to begin this month, and the group’s next meeting is scheduled for June 4. While the growth demand fears may limit the potential for oil prices to increase significantly, expectations are high for OPEC+ to make efforts to maintain prices above the $70 per barrel level.

Wildfires Impact Canadian Oil Output

Furthermore, oil prices are being supported by the recent state of emergency declared by the Canadian province of Alberta. This was in response to wildfires that have displaced nearly 30,000 people and forced energy producers to shut down at least 280,000 barrels of oil equivalent per day, which represents over 3% of Canada’s total output.

Technical Analysis

WTI Oil traders are trying to establish new higher support at $72.57 (S1). If successful, it could drive prices into the pivot at $78.02 over the near-term.

On the downside, a failure to hold $72.57 (S1) will be a sign of weakness. This could be the trigger point for an acceleration into (S2) at $68.49.

Essentially, the near-term direction will be controlled by trader reaction to $72.57 (S1).

Resistance & Support Levels