Three oil barrels symbolizing the WTI (West Texas Intermediate) crude oil market.

Table of Contents

Crude futures’ rally gathered momentum last week, with the commodity surging by over 8% escaping from its monthslong consolidation phase near the $72 per barrel trading range, supported by a fresh bout of escalatory tensions in Middle East that see no end and renewed optimist after a massive stimulus programme pledge by Beijing authorities. This Oil report aims at analysing the fundamental drivers influencing WTI’s price action and seeks to assess its future outlook and conclude with a technical analysis.

An oil barrel, representing a fundamental unit in the oil and energy industry.

US base struck by drone near Jordan-Syria border

Yesterday, according to a White House officials report, 3 US service men found an unfortunate end at a base in Jordan and 35 more were injured, after an unmanned aerial vehicle (UAV) struck the base, with early reports indicating that the hit was conducted by radical Iran-backed militant groups. Iranian officials distanced themselves from the accusations, stating that it had nothing to do with the attack, dismissing responsibility and without a doubt, further investigations are needed.

The event sparked far reaching outrage in Washington, with longstanding critic of Iran and “war-hungry” senator Lindsay Graham telling Biden to “hit Iran now, hit them hard”. Shortly after the incident, President Biden was briefed by his national security team, and intensive military fighter and reconnaissance aircraft activity has been observed near the Iraqi-Syrian border on the outskirts of the city Al-Bukamal in Syria. The US President at a speech noted “we shall respond” and pressure now mounts for retaliatory actions, with probabilities for an escalation of the conflict in a broader arena appearing imminent at the time of this writing.

Crude oil whipsaws after Red Sea escalations

Last Friday, Yemeni Houthi rebels continued to attack passing maritime vessels than transit via the Bab El-Mandeb strait into the Red Sea and the latest victim was one of Trafigura’s, a commodity trading firm, fuel tanker. Marlin Luanda, the oil tanker, was struck by missiles near the Gulf of Aden and the naphtha cargo quickly caught fire, yet via the use of firefighting equipment on board, the crew managed to contain and supress the fire.

A Houthi spokesperson after the incident commented that “Yemeni Armed Forces persist with their military operations: enforcing a blockade on Israeli navigation in the Red and Arabian seas until a ceasefire is achieved in Gaza, and food and medicine are allowed into the besieged Palestinian people in the Gaza Strip.”

The acts sparked the response from US and UK naval allied forces who retaliated with another round of strikes on Yemen’s infrastructure and a the Pentagon issued a statement noting that the crisis in the Red Sea is international and not just regional, vowing to limit the capabilities of the rebels, reiterating once again that “the Houthis will bear the responsibility for the consequences should they continue to threaten lives, the global economy, or the free flow of commerce in the region’s critical waterways”.

Inbound stimulus package from China lifts spirits

Projections for higher demand for oil by the world’s largest consumer China, improved in recent days as investors apprehended the latest announcement from Beijing officials with joy, upwardly revising their outlooks. Last week, PBoC unexpectedly slashed 50 basis points off the Reserve Ratio Requirement (RRR) from its commercial bank’s obligations, which will take effect in early February, in attempts to bolster spending and revive the sluggish economy, which have kept investors at bay for some time, but the development can now act as the green light for allocating funds. Furthermore, authorities pledged to support the deteriorating performance of the nation’s capital markets, by shoring up and deploying 2 trillion Yuan from offshore government accounts to buy mainland shares.

The next point of inflection for traders will be the updated manufacturing and services PMI updates from the Red Giant in Wednesday’s early Asian session, staying vigilant and ready to assess the recovery progress of the nation, amidst a persistent deflation risks, faltering demand and severely deteriorating property conditions.

Oil Technical Analysis

WTI Cash Daily

  • Support : 76.50 (S1); 74.00 (S2); 71.00 (S3);
  • Resistance: 79.50 (R1); 82.00 (R2); 85.00 (R3);

Looking at WTI Daily chart we observe that crude prices broke past the apex of the symmetrical triangle created at the start of December, as the bulls’ resolve solidified and aided to the escape from the monthslong trading range near the $72 per barrel level. Hence, given the clear breakout from the former 76.50 former resistance level, which has now turned support, we hold a bullish outlook bias for the commodity, as buyers took the initiative.

Supporting our case is the RSI reading below our daily chart, registering a value of 62 which indicates that the move is in favour of the bulls, alongside the distancing apart of the MACD line with the signal line, which gives rise to larger histogram bars. Furthermore, the break of the MACD line above the zero line (threshold) yielded the definitive buy signal for the commodity late last week, paired with the full-bodied bullish candles that followed for confirmation of a shift in trend.

Should the bulls remain in charge, we may price action breaking decisively past the $79.50 (R1) resistance level and head towards the $82.00 (R2) resistance barrier, where our target lies. Under extreme bullish momentum we may see the price reaching somewhere close to the $85.00 (R3) level. Should on the other hand, the bears take over, we may see the retracement and the break below the recent $76.50 (S1) support level and the fall of the commodity near the $74.00 (S2) support base.

Disclaimer: This material is for general informational & educational purposes only and should not be considered as investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked, in this communication.

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