Oil Prices Gain Momentum Amid Colder Weather and Geopolitical Tensions

Oil prices continue to rise from recent lows, driven by increased demand for heating fuels due to colder-than-normal weather in the Northern Hemisphere. WTI crude oil (CL) trades around $76.50 per barrel, maintaining positive momentum on short-term charts. Similarly, Brent crude oil (BCO) has hit the key resistance of $81 per barrel. The freezing conditions across Europe and the US are expected to persist, further boosting the demand for winter fuels.

Colder Weather and Economic Shifts Boost Oil Demand

The Energy Information Administration (EIA) expects global oil production to increase by 1.6 million barrels per day (bpd). Non-OPEC+ countries are projected to account for 90% of this growth. Additionally, the EIA predicts US crude oil net imports will decline by over 20%, bringing imports to their lowest levels since 1971. Continued growth in domestic production drives this decline.

On the other hand, short-term market dynamics reflect tightening supply concerns. The Brent futures market structure shows stronger backwardation, signalling reduced supply or increased demand. Analysts at JPMorgan project that global oil demand in January will increase by 1.4 million bpd year-on-year. This increase is driven by colder weather and increased travel in China for Lunar New Year celebrations.

Despite positive sentiment, the strong US dollar and the Federal Reserve’s interest rate policies may limit the upside potential for oil prices. The chart below illustrates the Coincident Economic Activity Index and the Federal Funds Effective Rate, highlighting economic conditions and monetary policy changes. The Economic Activity Index measures economic growth, while the Federal Funds Rate reflects the US central bank’s monetary stance. A sharp decline in economic activity and low interest rates during 2020 signalled the pandemic-induced recession, followed by a robust recovery.

Subsequently, a rise in interest rates starting in 2022 indicated the Federal Reserve’s tightening policy to curb inflation. Recently, the Fed has begun cutting interest rates, which could stimulate economic growth and energy demand, thereby supporting higher oil prices during the first quarter of 2025.

Geopolitical Tensions Drive Oil Market Rally Amid Supply Risks

Geopolitical uncertainties also support the rally in the oil market. A fire at an oil depot in Russia’s Volga region, reportedly caused by a Ukrainian drone attack, highlights rising geopolitical risks. This incident has increased the risk of disruption at a key facility near a Russian military air base. It underscores the vulnerability of oil infrastructure amid ongoing tensions.

Moreover, Iran is conducting extensive air defence exercises as it prepares for potential confrontations with Israel and the US. The drills aim to protect critical infrastructure, including nuclear sites. These actions follow concerns that incoming US policies may tighten sanctions on Iran’s oil exports and embolden Israel to target Iran’s assets.

Furthermore, the US has imposed new sanctions on Russia’s energy sector, targeting major oil companies and shipping vessels. Russia has condemned these measures, warning of potential destabilizing effects on global markets. These sanctions and the ongoing war in Ukraine further strain global oil supplies. These geopolitical uncertainties impact the oil market and could have long-term implications for its trends and stability.

Long-Term Oil Trends Show Neutral Momentum

The long-term chart for crude oil shows that the oil market has turned from a pivotal junction. This junction is defined by the symmetrical triangle in the monthly chart below. The price failed to break below the symmetrical triangle and rebounded higher. The chart indicates that WTI crude oil rebounds from the strong long-term support zone at $66 and shows positive momentum.

However, the price remains within the symmetrical triangle, awaiting its next direction. The RSI indicator is recovering from the mid-level, suggesting the oil market remains neutral. This price action indicates a possible continuation of the rebound within the symmetrical triangle.

The weekly chart further supports the above analysis, showing the price rebounding from the $66 support level with bullish momentum. The price must breach the short-term resistance at $78 to challenge the strong resistance at $82.50.  A breakout above $82.50 would pave the way for higher prices and signal strong bullish momentum.

Short-Term Oil Trends Approach Resistance Levels

WTI Oil Daily – Resistance at $78

While the long-term price trend remains neutral until WTI crude oil breaks above $82.50 and $92, the short-term trend indicates that the price is approaching a pivotal junction. The price has broken above the 200-day SMA, but the 50-day SMA remains below the 200-day SMA, suggesting consolidation. Last week, the price hit $78, a strong key resistance of the triangle. The daily chart shows that the RSI is overbought, indicating a potential price correction. On the other hand, a break above $78 would signal further upside with the support within the $75-$74 zone.

Brent Oil Daily – Resistance at $81

Similarly, Brent crude oil shows that the price has reached the black trendline at $81. A break above $81 is necessary for the trend to continue upward. The quick reversal from the orange support zone indicates bullish price action. A breakout above $81 would pave the way for higher prices.

The daily line chart further supports the bullish price action, which shows a descending broadening wedge pattern. The chart indicates that the RSI is currently at overbought levels, while the quick reversal from support has formed a cup pattern. The cup pattern highlights strong price support at $76. If the price fails to break above $81, it may find support around the neckline of the cup pattern at $76.

Bottom Line

In conclusion, rising demand, geopolitical uncertainties, and technical price dynamics influence the oil market. These factors impact short-term price movements and set the stage for long-term trends. Colder weather, increased travel to China, and tightening supply concerns drive bullish momentum in WTI and Brent crude oil.

While long-term trends remain neutral, the market approaches critical resistance levels that could signal further price gains. Geopolitical risks, including new sanctions on Russia and tensions with Iran, add to the market’s complexity and potential volatility. Traders and analysts will closely monitor key resistance levels and economic policy changes, as these factors will play a crucial role in shaping the future direction of oil prices. WTI crude oil and Brent oil have hit $78 and $81, respectively. A break above these levels is required for sustained bullish momentum in the oil market.