A COMEBACK FOR CRUDE

Oil price decline arrested

Both Brent and WTI ended their longest streak of weekly declines in half a decade with a small gain last week. U.S. Federal Reserve meeting last week raised hopes that interest rate hikes are over and cuts are on their way. Oil bulls interprete dovish Fed outlook as a way for soft landing for the U.S. economy. That bodes well for crude oil demand going forward. Oil prices climbed bolstered by a larger-than-anticipated drop in U.S. crude stockpiles and the dollar’s weakness following the dovish stance of the Fed. WTI crude futures are holding above $70 per barrel.


Support for oil price

Oil prices climbed due concerns about potential oil supply disruptions following attacks on ships in the Red Sea by the Houthis. Russia’s decision to deepen oil export cuts earlier than expected, along with adverse weather conditions, also contributed to a stronger market opening. With Saudi Arabia hinting at potential extensions or deeper cuts, the Oil price’s stability could receive substantial backing.


Inelastic nature of oil pricing

Ongoing production reductions by OPEC and its allies are likely to curb further downside risks. The recent sharp decline in oil prices might not entirely align with demand realities due to the inelastic nature of oil pricing, where supply factors hold more sway. Considering these measures and an anticipated demand rebound, upward price pressure seems plausible moving forward.


Crude oil price: A technical perspective

Last week’s bullish signal halted the seven-week decline in crude oil price. Technical signals might attract buyers seeking a rebound. For confirmation of a bullish trend, upward momentum above last week’s high at $72.56 and a break beyond the resistance of $75, are key benchmarks to watch.


Why is crude oil price stagnant?

Before last week’s reversal, oil prices had fallen for 7 straight weeks. The drop followed the voluntary output cuts that were made by OPEC+ a couple of weeks ago, which left the markets unimpressed. The sell-off gained momentum as successive support levels succumbed, giving rise to more technical selling. As well as doubts regarding the effectiveness of OPEC’s recent output cuts, investors have also been concerned by the continuous growth in US crude exports, pointing to excessive non-OPEC supplies.


Markets unimpressed

On top of this, fears about demand have also played a big part in the recent drop. The global economy remains stagnant due to elevated interest rates, while the lingering impact of past inflation spikes continues to negatively affect both consumers and businesses. Israel-Hamas conflict has intensified, but has failed to draw in larger participants. The Yemen’s Houthis attack on two ships in the southern Red Sea on Dec 18 has raised the risk premium for oil. But that too has not had the same effect on oil price the way Ukraine conflict did in its beginning phase.


Stagnant oil prices stem from varied reasons: decreased U.S. oil inventories against earlier builds, doubts on OPEC’s cuts, surging U.S. crude exports, global economic stagnation due to high interest rates, and geopolitical tensions. Technically, crude oil hints at a bullish reversal, requiring sustained upward momentum for confirmation. A consolidation within $70 and $74 is required for oil prices to sustain a breakout in any direction.


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