Temporary Halt to Crude Oil Rally

Andreas Thalassinos
Andreas Thalassinos

26.2.2024

Despite the less-than-anticipated growth in crude oil stockpiles, as reported in the latest release, the commodity closed the week at $76.786 per barrel, unable to mount an upward rally due to concerns over weakening demand in the face of declining economic indicators in the United Kingdom for two consecutive quarters, Japan's economic contraction in the last quarter, persisting geopolitical tensions and delays in the US interest rate cuts. As a result, crude oil prices failed to surge despite the inventory data.

Overview

Despite the less-than-anticipated growth in crude oil stockpiles, as reported in the latest release, the commodity closed the week at $76.786 per barrel, unable to mount an upward rally due to concerns over weakening demand in the face of declining economic indicators in the United Kingdom for two consecutive quarters, Japan's economic contraction in the last quarter, persisting geopolitical tensions and delays in the US interest rate cuts. As a result, crude oil prices failed to surge despite the inventory data.

Technical Analysis

Since December 13, the price of Crude Oil has been on an upward trajectory, bouncing off the trough at 67.708, which was influenced by economic and geopolitical events. The price chart has displayed the development of successively higher peaks and higher troughs, resulting in a rally that reached 79.184. This matches the 50% retracement of the downswing formed by 90.973 and 67.708, posing a barrier to further advancement. The formation of an evening star, a bearish candlestick pattern, has reinforced the downward bias and paved the way for a potential correction, putting at least a temporary halt to the rally. The potential downward corrective wave is supported by the Momentum and Stochastic oscillators. Specifically, the Momentum has already moved below its baseline, while the Stochastics signaled extreme overbought levels and subsequently formed a failure swing to the downside. However, prices remain above the 50-period Moving Average line.

Potential Downside Targets

In the event that Crud Oil succumbs to bearish pressure and enters a downward corrective phase, traders may consider the following potential downside targets:

75.527: The initial target represents a retest of the recent low price established on February 12.
74.335: The next potential target can be estimated by calculating the 61.8% retracement level of the recent upward movement that ranged from 71.360 to 78.754.
71.360: The third potential price target is seen at 71.360, corresponding to the beginning of the recent upswing.

Potential Upside Targets

Conversely, should the bulls manage to take control of the market,  the following price targets may be estimated:

79.184: One possible level of resistance is determined at 79.184, which corresponds to the peak formed on January 28. This level may pose an obstacle to upward movement, requiring careful consideration and analysis.
80.625: An additional upward objective may be seen at a cluster of lows formed between the 1st and 3rd of November.
83.017:  The trough of 83.017, which was marked on October 25, represents an additional price objective.

Fundamentals  

The following economic events, along with the prevailing market sentiment, provide valuable insights into the factors that shaped the direction of Crude Oil last week:

On February 22, the Energy Administration Information released its latest report on commercial crude oil inventories in the United States, excluding those in the Strategic Petroleum Reserve. The report indicated that the inventories had increased by 3.5 million barrels compared to the previous week. The US crude oil inventories currently stand at 443.0 million barrels, approximately 2% lower than the five-year average for the corresponding period.
Note that if the crude inventories increase is greater than expected, it indicates a weaker demand and a decline in crude oil prices. Similarly, if the decline in inventories is less than expected, it also shows a decrease in demand and can lead to a decline in prices.
On the other hand, if the amount of crude oil held in inventories increases less than anticipated, it implies an increase in demand, which typically leads to a rise in oil prices. The same can be said if a decline in inventories is more than expected.

However, the increase in crude oil inventories, less than anticipated (3.9 million barrels), did not provide sufficient momentum for oil prices to register an upward surge on the day of the data release.

The next announcement of the Crude Oil Inventories is set for Wednesday at 15:30 GMT.

Furthermore, the S&P Global Flash US Manufacturing PMI for February 2024 increased to 51.5 from January's 50.7, surpassing the predicted 50.5. This suggests that the factory sector grew at its strongest rate since September 2022, as output rose for the first time in three months. Additionally, this is the fastest pace of growth since April 2023. The surge in output is attributed to stronger client demand and a sharper uptick in new orders, which rose the most since May 2022. New export orders also increased. Manufacturers noted that quicker delivery times enabled faster processing of orders.
Readings greater than 50 indicate industry expansion in the industry. Despite being only modest, the gauge has shown growth in consecutive months for the first time in over a year.

Moreover, the UK gross domestic product (GDP) is estimated to have fallen by 0.3% in Quarter 4 (Oct to Dec) 2023, following an unrevised fall of 0.1% in the previous quarter; hence, the economy has decreased for two consecutive quarters across 2023.

Also, according to the latest FOMC minutes, policymakers agreed that they require more assurance regarding the declining inflation rates to the central bank's 2% target before initiating rate cuts from the 5.25%-5.50% range set in July. The language in the minutes suggests that they might adopt a more cautious and gradual approach toward the rate cuts that traders expect to start in June. Usually, a decline in interest rates fosters economic growth, contributing to a rise in the demand for Oil.

Conclusion and Considerations

In conclusion, the current trajectory of the crude oil market is upward, but the possibility of a downward correction cannot be ignored. This analysis is based on several factors, including concerns for a slowdown in global demand, contradicting economic indicators, and the potential strengthening of the US dollar. To navigate the highly volatile financial markets, it is imperative for traders to stay abreast of economic events and geopolitical changes, enabling them to make well-informed trading decisions.

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Andreas Thalassinos
Andreas Thalassinos

Andreas Thalassinos is a recognized authority in the financial markets and world renowned for his expertise in algorithmic trading. He is a Certified Technical Analyst and highly respected lecturer in the education of traders, investors, and financial markets professionals. Thalassinos has played a key role in the development of education within the industry, training tens of thousands of traders of all skill levels. Traders value his seminars and workshops for the rich content, his passionate, charismatic, and lively presentations.