Oil prices gave up their earlier gains yesterday and have since extended their declines. The American Petroleum Institute (API) reported disappointing oil inventories data last night ahead of official figures from the US Department of Energy today. Headline US oil inventories are expected to come in at +1.2 million barrels, but the potential for disappointment is there given the API’s estimate of +7.3m barrels. But even if prices fall, we think the downside could be limited.
The sharp recovery since the start of the year suggests investors have revised their views on the supply and demand forces impacting crude oil prices. Fears over a global economic slowdown have eased and this has helped to boost crude’s demand outlook, which looked bleak at the end of last year. This is because incoming data in the US has bucked the trend of disappointing macro numbers from Eurozone and China, while optimism over a US-China trade resolution has further brightened sentiment towards risk-sensitive assets across the board. On the supply side, although US shale production continues to rise, the OPEC+ production cuts and involuntary production outages are counterbalancing that.
In terms of technical analysis, below are some of our key thoughts:
- Crude’s ongoing consolidation is not necessarily a bad thing as it allows momentum oscillators such as the Relative Strength Index (RSI) to continuing working off their ‘overbought’ conditions. It would be bullish if this is done through time as is the case now, rather than via a sell-off, which is also possible.
- For crude to turn bearish, we will need to see a clear reversal pattern. On WTI, there is a potential “double top” pattern evident on the daily chart around $57.50. What’s more, we have seen a number of bearish-looking daily candles over the last couple of weeks or so.
- However, the bulls have so far been resilient. The neckline of the above-mentioned double top pattern, at $55, is still holding while the bullish trend line connecting this year’s lows is also intact. What’s more, WTI is still holding in the sweet spot above the 21-day exponential moving average.
So, as things stand, crude oil is currently in consolidation mode after surging higher in the first two months of the year. There are, however, tentative technical signs to suggest a potential reversal in the bullish trend. But we haven’t seen the bearish trigger yet.
Source: TradingView and FOREX.com. Please note, this product is not available to US clients