Oil Price Forecast: Slight Recovery as Interest Rates, Supply Concerns Shape Market Outlook

Highlights

• WTI crude oil rebounds after a 2% drop, influenced by interest rate hike signals.
• Private industry data shows a decline in U.S. crude and gasoline inventories.
• Brent oil’s price structure indicates diminishing concerns about supply shortages.

Overview

U.S. West Texas Intermediate (WTI) crude oil futures are rebounding after a 2% drop, as traders cautiously navigate the uncertain landscape. The market is influenced by signals that central banks may continue raising interest rates. Meanwhile, private industry data revealed a decline in U.S. crude and gasoline inventories during the peak summer driving season.

Rangebound for Months

WTI prices have been fluctuating within a $10 range since May, driven by changing expectations for interest rates. European Central Bank President Christine Lagarde highlighted the need to avoid ending rate hikes due to persistently high inflation, which could impact economic activity and oil demand.

Pressured as Interest Rate Hikes Loom

Policymakers, despite concerns about Europe’s slowing economy, are determined to proceed with interest rate hikes, exerting downward pressure on oil prices. On a positive note, U.S. consumer confidence in June reached its highest level in nearly 1-1/2 years, reflecting renewed optimism in the labor market. However, this upbeat data suggests that the Federal Reserve will likely continue raising interest rates to balance the overall economy. Since March 2022, the central bank has already implemented a 500 basis point increase in its policy rate, and it expects to have two additional rate hikes this year.

API Reports Crude, Gasoline Draws

Tuesday’s data from the American Petroleum Institute (API) indicated a decline in both U.S. crude oil and gasoline inventories. Crude stocks fell by approximately 2.4 million barrels, while gasoline inventories dropped by about 2.9 million barrels. More clarity on stockpiles is expected with the release of U.S. government data from the Energy Information Administration (EIA).

Brent’s Backwardation Hits 6-Month Low

Switching the focus from WTI, Brent oil’s six-month backwardation, a price structure where earlier-loading contracts trade above later-loading ones, has reached its lowest level since December. This suggests diminishing concerns about supply shortages. The two-month spread indicates a shallow contango, implying a slightly oversupplied market.

Focus Remains on Chinese Demand

Despite the recent aborted mutiny by the Wagner mercenary group in Russia, geopolitical events have taken a backseat to persistent macroeconomic factors. The focus remains on whether Chinese oil demand will pick up in the second half of the year. Chinese Premier Li Qiang has expressed intentions to stimulate markets, but without specific details, uncertainty lingers in the oil market.

Short-Term Outlook:  Bearish Tone

In summary, WTI crude oil futures are recovering from a recent drop, driven by expectations of further interest rate hikes and declining U.S. inventories. The impact of higher interest rates on economic activity and oil demand remains a concern. Market participants are closely watching inventory data and the interplay of price structures in Brent oil. Additionally, the potential resurgence of Chinese oil demand in the second half of the year remains a key factor to monitor.

Technical Analysis

Market sentiment for WTI Crude Oil is slightly bearish. The price has increased compared to the previous 4-Hour Close, indicating a possible developing shift in momentum. However, the price is trading below both the 200-4H and 50-4H moving averages, suggesting strong bearish sentiment. The 14-4H RSI is below the neutral level of 50, indicating moderate bearish sentiment.

The market is finding support within the main support area at 67.37 to 68.31, but there is significant resistance area that poses a barrier for upward movement. Overall, it is important to closely monitor the market for any potential shifts in sentiment or price movements.