Crude oil prices (WTI) dropped to start Wednesday’s trading at $79.69, with growing market concerns about a potential slowdown in Chinese fuel demand.
The decrease in weekly oil inventories slightly supported prices, but the increasing supply continues to limit upward potential.
China recently reported a slowdown in second-quarter growth figures, which nullified market expectations of increased Chinese demand.
After spending most of 2024 anticipating a rise in Chinese demand for crude oil, markets are now pricing in fears that limited Chinese growth won’t provide sufficient demand to offset the surplus in global markets.
Despite the decrease in U.S. oil inventories, fully refined gasoline stocks increased by 365,000 barrels, with an additional accumulation of partially refined oil derivatives by 4.92 million barrels as markets try to absorb the high supply of crude oil products.
In my view, oil prices are moving with clear volatility due to movements in the U.S. dollar, concerns about Chinese demand, and expectations of a shrinking global oil balance during the third quarter of the year. With Brent crude stabilizing on the Intercontinental Exchange at less than $85 a barrel, it is evident that the strength of the U.S. dollar and concerns about Chinese demand are the main drivers of the market in the near to medium term.
European natural gas prices also dropped yesterday. Natural gas futures prices stabilized at 1.1% during the day, with European gas inventories exceeding 81%. I believe that in the absence of significant supply disruptions, inventories are on track to reach 100% of their capacity before the heating and winter season, which may increase downward pressure on prices.
The LNG market continues to face some supply disruptions. The Freeport LNG export facility in the U.S. has not returned to normal operations after Hurricane Beryl. However, the facility is expected to undergo a gradual restart starting this week.
In my opinion, OPEC+ is still moving towards beginning the end of long-standing voluntary production cuts by the end of September. The production cuts, aimed at supporting struggling crude oil prices, face increasing opposition within OPEC+ as smaller countries bearing the burden of voluntarily pumping less crude oil rely on market participation to balance government budgets.
I also believe that escalating geopolitical events in the Middle East have played a significant role in influencing markets recently. Conflicting statements regarding the halt of ceasefire talks in Gaza added to regional instability, further impacting oil prices and causing unbalanced price fluctuations.
On a positive note for oil markets, I expect ongoing production cuts by OPEC+ and Iraq’s plans to offset any production surplus starting in 2024 to stabilize prices amid global demand fluctuations. This is especially after China announced a 2.3% drop in oil imports during the first half of 2024. Meanwhile, the U.S. oil market faces significant challenges, with the number of active oil refineries dropping to its lowest level since December 2021. This explains the current volatility and consolidation in energy markets, which await drivers to support a clear directional momentum in the near to medium term.
Technical analysis of crude oil (WTI) prices
Technically, yesterday’s decline pushed crude oil below the 200-hour Exponential Moving Average (EMA) at $81.30, with accelerating bearish momentum. The downturn extended below the $80.00 level, dropping crude oil prices by more than -5.5% from peak to trough in July. After the recent failed rally, the price could drop further to touch the 200-day EMA at $79.07 after breaking through the key support at $80.00.
Crude Oil (WTI) – Prices Chart –-XS.com
After reaching its lowest level in three weeks at $79.62, near the 38.2% Fibonacci retracement level of the wave from $72.46 to $84.50, which bounds the daily Ichimoku cloud top, crude oil prices continue to experience mixed daily volatility lacking a clear directional signal. With a solid break below the $80.00 and $79.60 zones, this could be interpreted as a strong bearish signal, supported by the completion of a bearish price wave pattern on the daily chart, targeting support around $78.71.
On the other hand, any upward movements should be limited below the $81.66 level, which represents the 23.6% Fibonacci retracement level, to maintain the bearish trend. A rebound above this level could signal an initial indication of a deep corrective uptrend in the longer-term bullish price wave.
Oil prices are currently above the 200-day Exponential Moving Average (EMA) near $79.27, and pressure and penetration below this could lead to an extended decline towards early June’s lows near $72.45, which is the stronger scenario.
Support Levels: $79.20 – $78.77 – $78.00
Resistance Levels: $80.20 – $80.55 – $82.00
