Oil Price Forecast: Tighter Supply Concerns Amid Confidence in Global Growth

Highlights

• Oil prices rise on positive supply indications and Chinese support.
• Analysts foresee further growth due to OPEC+ production cuts.
• Global central bank policies boost confidence in economic support.

Overview

US West Texas Intermedidate (WTI) crude oil prices continued their upward trend on Tuesday, gaining ground for the third consecutive session. Positive indications of tighter supplies and reassurances from Chinese authorities to bolster their economy contributed to the optimistic sentiment in the market.

At 06:07 GMT, Light Crude Oil Futures are trading $78.93, up $0.07 or +0.09%.

Further Supply Tightening Ahead

The recent surge in crude benchmarks extends the rally for four consecutive weeks, with expectations of further tightening due to production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+. Analysts foresee the potential for even more growth in the short term.

Confidence Growing in End of Rate Hike Cycle

Energy traders are growing increasingly confident that global central banks will soon conclude their tightening policies, which could lend support to global economic growth. This optimism is particularly noteworthy in China, the world’s second-largest economy and a significant oil consumer. Chinese leaders have pledged to reinforce policy support to stimulate the economy, with a focus on boosting domestic demand.

Bearish Indicators:  Global Business Activity Contractions

However, there are some bearish indicators in other regions, like the euro zone and the United States, signaling weaknesses in the global economy. In the euro zone, business activity contracted more than anticipated in July, with declines in the dominant services industry and factory output, raising concerns about the post-COVID recovery.

US Service Sector Slowdown Offset by Falling Inflation

Similarly, business activity in the United States slowed to a five-month low in July, primarily driven by a deceleration in the service sector. Nonetheless, there are encouraging signs, such as falling input prices and slower hiring, suggesting that the Federal Reserve is making progress in its efforts to combat inflation.

Fed, ECB and Chances of Futures Rate Increases

Investors are closely monitoring the Federal Reserve and European Central Bank (ECB) meetings this week, with quarter-point interest rate hikes already priced in. The focus now shifts to the statements of Fed Chair Jerome Powell and ECB President Christine Lagarde, providing insights into future rate increases.

API Expected to Report 2M Barrel Crude Oil Drawdow

Later on Tuesday, the American Petroleum Institute (API) will release industry data on U.S. crude inventories. Analysts estimate a decline of about 2 million barrels in inventories for the week ending July 21, which could further impact the market sentiment.

Short-Term Outlook:  Cautious Buying

In conclusion, oil prices are experiencing upward momentum, supported by expectations of tighter supplies and positive economic signals from China. However, bearish data from the euro zone and the U.S. raises concerns about the global economy’s overall health. Investors are eagerly awaiting central banks’ decisions and statements, which will likely influence the market’s short-term direction. Additionally, the API’s upcoming report on U.S. crude inventories will be a crucial factor to watch as traders assess the supply and demand outlook.

Technical Analysis

WTI Crude Oil market is exhibiting bullish sentiment as the 4-hour price of 78.96 hovers above the 200-4H and 50-4H moving averages at 72.15 and 76.12, respectively. The 14-4H RSI at 74.16 indicates stronger momentum.

Main support rests at 73.81 to 74.62 as the market trades inside the main resistance area of 77.93 to 79.18.

These technical indicators suggest a positive trend, but vigilance is essential as energy markets can shift swiftly. Currently, the market is testing resistance while in an overbought position, making it vulnerable to a sudden reversal to the downside.