Oil Price Forecast: Prices Retreat Amidst Fuel Demand Concerns, Weak China Data

Highlights

• WTI crude oil prices decline on profit-taking and rate hike concerns.
• Weak economic data from China adds to negative market sentiment.
• Lack of fuel demand growth limits oil price gains despite supply curbs.

Overview

West Texas Intermediate (WTI) crude oil prices traded lower on Thursday, retracing some of the gains from the previous day. Investors decided to take profits amidst concerns about potential interest rate hikes that could dampen economic growth and global fuel demand. Additionally, weak economic data from China further weighed on market sentiment.

EIA Report Fuels 3% Rise

Yesterday, the U.S. benchmark experienced a 3% climb following a report by the U.S. Energy Information Administration (EIA) stating that crude inventories had decreased by a significant 9.6 million barrels in the week ending on June 23. This drawdown far exceeded the 1.8-million barrel reduction that analysts had predicted in a Reuters poll.

Gains Capped by Rate Hike Worries

However, the market sentiment shifted due to renewed worries about potential interest rate hikes in the United States and Europe. Such rate increases would likely have a negative impact on global oil demand. Notably, leaders of the world’s top central banks recently reaffirmed their belief that further policy tightening would be necessary to address persistently high inflation, although they aim to achieve this without triggering recessions.

Worries Over China Fuel Demand Growth

While these concerns persisted, China’s industrial firms faced a double-digit decline in annual profits during the first five months of the year, primarily due to softening demand and squeezed margins. This lack of prospects for fuel demand growth has limited the upward momentum of oil prices, despite efforts by oil producers to curtail supply.

Saudi Output Cuts, US Rig Reductions

Saudi Arabia, in response to falling prices, pledged to significantly reduce its output in July, building upon the broader OPEC+ agreement to limit supply until 2024. In the United States, energy firms have been reducing the number of operating oil and natural gas rigs for eight consecutive weeks, indicating a trend of decreased production.

Brent Backwardation:  Solid US Fuel Demand Now, Global Slowdown Later

Brent’s six-month backwardation, where immediate delivery trades higher than later, is at its lowest level since December. This indicates changing market dynamics. This suggests higher demand for immediate delivery. The expectation is that the US, in the midst of the driving season, will maintain solid immediate demand for fuels. However, concerns remain that the global economy may slow down in the second half of the year, subsequently reducing oil demand.

Short-Term Outlook:  Traders Selling Rallies

In conclusion, WTI crude oil prices faced downward pressure due to profit-taking and concerns over potential interest rate hikes. Weak economic data from China also contributed to the negative sentiment. Efforts to limit supply are in place, but weak fuel demand and factors like electric vehicles are limiting price gains. The market response is uncertain, but caution is advised due to global economic uncertainties.

Technical Analysis

WTI Crude Oil exhibited a slightly bearish sentiment as prices traded below the 200-4H and 50-4H moving averages. The current 4-hour price of 69.16 was marginally lower than the previous close of 69.42, indicating a minor downward movement. The 14-4H RSI reading of 49.98 suggested a relatively neutral market sentiment.

The main support area ranged from 67.37 to 68.31, while the main resistance area spanned from 72.75 to 73.55. With the price trading within these levels, neither support nor resistance is being significantly challenged at this time although support held up nicely the previous session.

Traders should monitor price movements closely for potential trend confirmation or reversal. Meanwhile, the position of the moving averages suggests traders should watch for a potential test of resistance or an upside breakout if the buying volume is strong enough.