Oil Price Forecast: Steady Amid Rate Hike Anticipation, Chinese Stimulus Prospects

Highlights

• WTI slightly lower, Brent steady at $80.
• Brent and WTI extended gains last week.
• Traders anticipate rate hikes, eye Chinese stimulus.

Overview

US benchmark West Texas Intermediate crude oil futures are slightly lower on Monday, as traders held their breath, awaiting key rate hike signals from both U.S. and European central banks. Despite this mild pullback, Brent managed to hold steady at $80 a barrel, boosted by tightening supply conditions and optimistic prospects for Chinese economic stimulus.

Oil Benchmarks Extend Winning Streak

During the previous week, both Brent and WTI benchmarks recorded impressive gains of 1.5% and 2.2% respectively, extending their winning streak to four consecutive weeks. This surge in prices came amidst expectations of supply constraints following OPEC+’s commitment to production cuts. However, the situation in Ukraine added an additional layer of complexity as fighting escalated, and Russia withdrew from a U.N.-brokered agreement on safe sea corridors for grain exports.

Investors Anticipate Interest Rate Hikes

As we approach the current week, the spotlight remains on the Federal Reserve and the European Central Bank, with investors anticipating quarter-point interest rate hikes. The focus, however, lies on the statements of Fed Chair Jerome Powell and ECB President Christine Lagarde, as market participants seek hints about future rate hike trajectories.

The tightening interest rates have had a dampening effect on investments and have consequently strengthened the U.S. dollar. This phenomenon has made dollar-denominated commodities, including oil, more expensive for holders of other currencies, adding further pressure on oil prices.

China’s Stimulus Optimism

On the brighter side, market players are optimistic about China’s potential implementation of targeted stimulus measures to bolster its economy. As the world’s second-largest oil consumer, any measures to support economic growth are likely to have a positive impact on oil demand.

China’s state planner has already unveiled measures to promote private investment in select infrastructure sectors and pledged strengthened financing support for private projects. These actions are expected to further fuel oil demand and contribute to price stabilization.

OPEC+ Production Cuts Supportive

Regarding supply, United Arab Emirates Energy Minister Suhail al-Mazrouei assured the market that OPEC+’s actions to support oil are currently adequate, but the group stands ready to respond if the need arises. Such reassurances provide an additional layer of confidence for traders and investors.

US Firms Continue to Cut Oil Rigs

In the United States, energy firms took a cautious approach, making the deepest cut in oil rigs since early June, with seven operating units taken offline, according to energy services firm Baker Hughes.

Short-Term Outlook:  Cautiously Bullish

While some short-term price volatility may arise from the upcoming rate hikes, overall market sentiment remains positive due to OPEC’s supply cuts and the anticipation of further stimulus in China. As we venture into the third quarter of 2023, the prevailing expectation is that oil prices will continue their upward trajectory, driven by the prevailing market conditions and demand rebound.

Technical Analysis

WTI Crude Oil exhibits a slightly bullish sentiment as the current 4-hour price of $76.86 is above the 50-4H moving average of $75.68, indicating potential short-term strength. Moreover, the price remains higher than the 200-4H moving average of $71.92, suggesting possible long-term support. The 14-4H RSI at 61.42 reflects a bullish momentum, being above the neutral level of 50.

The main support lies at $73.81-$74.62, and the main resistance at $76.92-$77.99. With the price straddling the lower level of the main resistance area, further gains may be a challenge. However, overcoming the zone could trigger an acceleraton to the upside. Traders must closely monitor the market’s reaction near these levels to gauge potential upward momentum.