Fundamental forces collide in a turbulent oil market

US West Texas Intermediate crude oil futures are trading slightly higher on Friday but are still in a position to post their first weekly loss in three weeks as mixed fundamentals continue to control price action.

Bullish traders are pinning their hopes for higher prices on dwindling fuel supplies for Russia, while bearish traders are betting on aggressive central bank interest rate hikes to combat runaway inflation and lockdowns China’s COVID will slow global growth and demand.

Meanwhile, a report from the International Energy Agency (IEA) on Thursday highlighted the dueling factors in the market, saying rising oil production in the Middle East and the United States and slower demand growth should “address an acute supply shortfall amid worsening Russian supply disruption.

Moreover, while much of the focus this week was on the European Union haggling over a Russian oil embargo, the latest U.S. inventory numbers underscored the momentum pushing prices higher.

Factors Affecting Supply

EIA cuts U.S. crude production forecast

On the supply side, the EIA has lowered its U.S. crude production forecast for 2022 and 2023. It now forecasts an average production of 11.9 million barrels per day (bpd) in 2022. , down from a previous estimate of 12 bpd.

U.S. crude production is expected to increase by 940,000 bpd to 12.85 million bpd in 2023, according to the same EIA monthly report. U.S. Total Oil…

US West Texas Intermediate crude oil futures are trading slightly higher on Friday but are still in a position to post their first weekly loss in three weeks as mixed fundamentals continue to control price action.

Bullish traders are pinning their hopes for higher prices on dwindling fuel supplies for Russia, while bearish traders are betting on aggressive central bank interest rate hikes to combat runaway inflation and lockdowns China’s COVID will slow global growth and demand.

Meanwhile, a report from the International Energy Agency (IEA) on Thursday highlighted the dueling factors in the market, saying rising oil production in the Middle East and the United States and slower demand growth should “address an acute supply shortfall amid worsening Russian supply disruption.

Moreover, while much of the focus this week was on the European Union haggling over a Russian oil embargo, the latest U.S. inventory numbers underscored the momentum pushing prices higher.

Factors Affecting Supply

EIA cuts U.S. crude production forecast

On the supply side, the EIA has lowered its U.S. crude production forecast for 2022 and 2023. It now forecasts an average production of 11.9 million barrels per day (bpd) in 2022. , down from a previous estimate of 12 bpd.

U.S. crude production is expected to increase by 940,000 bpd to 12.85 million bpd in 2023, according to the same EIA monthly report. Total oil consumption in the United States is expected to increase by 730,000 bpd to 20.51 million bpd in 2022.

U.S. Crude Inventories Rise Following Large Release of Strategic Reserves – EIA

Commercial U.S. crude inventories rose last week on a record release of oil from U.S. strategic reserves, but that couldn’t prevent a further dip in gasoline supplies ahead of the driving season, it said. Wednesday the Energy Information Administration.

Crude inventories rose 8.5 million barrels in the week to May 6 to 424.2 million barrels, while analysts had expected a drop of 457,000 in a Reuters poll.

The rise in crude oil inventories was due to a combination of the release of 7 million barrels from the United States Strategic Petroleum Reserve and a drop in exports. The release of the SPR was ordered by President Biden weeks ago with the intention of driving down gasoline prices.

The decline in exports was likely caused by a drop in foreign demand due to the strength of the US dollar. The greenback hit a 20-year high against a basket of major currencies last week, which likely dampened demand for the dollar-denominated commodity.

Separately, crude inventories at the Cushing, Oklahoma delivery center fell by 587,000 barrels last week, the EIA said. The EIA also reported that net imports of U.S. crude rose last week by 632,000 barrels per day, the EIA said.

High demand resulting in lower revenue

Refinery crude volumes rose 230,000 barrels per day last week, the EIA said, while refinery utilization rates rose 1.6 percentage points. Overall utilization now sits at 90%, but analysts noted that several US facilities have closed in the past two years.

Refineries still online are scrambling to meet strong demand, leading to energy product declines. Gasoline inventories fell by 3.6 million barrels in the week ending May 6. This caused inventories to drop to 225 million barrels. This is not good considering that the United States is on the cusp of driving season.

Distillate inventories, which include diesel and fuel oil, fell 913,000 barrels during the week to 104 million barrels, and are now at their lowest level since 2005. East Coast inventories are once again fell to a historic low.

Weekly technical analysis

July WTI Crude Oil Weekly

WTI

Analysis of trend indicators

The main trend is up according to the weekly swing chart. A trade at $116.43 will signal a resumption of the uptrend. A move to $61.32 will alter the main downtrend. This is highly unlikely, however.

The minor trend is also up. A move through the minor highs at $109.77 and $110.07 will reaffirm the uptrend. A trade at $94.47 will change the minor downtrend. This will shift the momentum down.

Retracement level analysis

The first minor range is $116.43-$88.53. The market is currently trading on the strong side of its retracement zone at $105.77 to $102.48, making it a support.

The second minor range is $88.53-$110.07. Its retracement zone at $99.30 to $96.76 is additional support.

If $96.76 fails as support, we could see an acceleration downside with the retracement zone at $88.88 at $82.37 the next target.

The main range is $34.55 to $116.43. If $82.37 fails as support, look for the sell to extend into its retracement zone from $75.49 to $65.83.

Weekly Technical Forecast

The direction of the June WTI Crude Oil market over the weekend ending May 20 will be determined by the reaction of traders at $105.77.

Bullish scenario

A sustained move above $105.77 will indicate the presence of buyers. If this move creates enough upward momentum, look for a retest of the minor high at $110.07. This is a potential trigger point for acceleration towards the contract top at $116.43.

Downside scenario

A sustained move below $105.77 will signal the presence of sellers. If this move creates enough downward momentum, look for a quick test of the 50% level at $102.48 followed by another retracement zone at $99.30 at $96.76.

A failure to hold $96.76 will indicate that the selling pressure is building. This could trigger a breakout in a support cluster at $94.47, $92.15 and $88.53.

Removing the minor low at $88.53 could trigger an acceleration towards the Fibonacci level at $82.37.

Short-term outlook

The market has been spiraling for over two months, creating a chart pattern that tends to lead to increased volatility.

With the market threatening the upper end of its two-month range, it looks like traders will be looking to break through the two highs at $109.77 and $110.07. If this move takes place, it would suggest that traders are favoring supply issues over demand issues.

Additionally, the gigantic shifts from the SPR to trading stocks cannot be ignored, but the market seems to be getting used to it. This decision may have helped to limit prices, but it did not quite live up to its initial expectations.

Crude oil prices are still relatively high and gasoline prices are poised to soar. This could be the catalyst that finally helps Crude Oil break out of its tight trading range.

Gasoline stocks send a danger signal shortly before the start of the driving season in the United States. That makes $5 gas a real target. Moreover, it will not solve the problem of inflation in the United States.

In summary, supply concerns and a favorable chart setup suggest that bullish traders will try to take the market to $110.07 and at least $116.43 in the near term.

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