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The Fundamental and Technical Backdrop Remains Bullish for WTI


OIL PRICE OUTLOOK: BULLISH

  • WTI oil prices make a round trip and end the week little changed around the $110 level, despite strong volatility
  • If China moves to lift Covid-19 lockdowns and Europe reaches a deal to ban Russian oil imports, the energy market could rally
  • This article looks at the key technical levels for WTI to watch in the near term

Most Read: Crude Oil Update – Uncertainty Around EU Oil Ban While COVID-19 Cases Fall in Shanghai

Oil prices were largely unchanged over the last five trading sessions despite strong volatility. On Monday and Tuesday, WTI plummeted almost 10% on demand concerns over the ongoing COVID-19 restrictions in China and global recession chatter, but the U.S. benchmark quickly recouped losses in the following days to end the week roughly flat around $110.00 per barrel.

Looking ahead, the outlook for crude remains constructive amid tight market conditions. First, China has signaled that the Shanghai’s lockdowns could end soon, possibly around May 20, the date by which health authorities aim to halt community spread of the virus. Once the government begins to lift the mobility restrictions that have disrupted the lives of millions of people in the country’s most populous city and disrupted everything from traveling to industrial production, oil imports should pick up, ahead of the high-demand summer season, bolstering prices for the commodity.

There is also another bullish catalyst on the horizon: the European Union’s plan to ban Russian oil imports in response to the invasion of Ukraine. The terms of the embargo are still being negotiated amid strong reservations from Hungary and Slovakia, two countries heavily dependent on Russian energy that are seeking exemptions and more flexibility while securing alternative suppliers. However, all member states are expected to fall in line in due course to move forward on the latest sanctions package under consideration, possibly before the end of the month.

Although Russia has seen some of its fossil fuel exports being sidelined in recent weeks, it remains the European Union’s top energy supplier, providing the region with about a quarter of its oil and refined product needs. In numbers, this represents about 2.2 million of bpd of crude and about 1.2 million of bpd of petroleum derivatives. Details are being finalized and may change, but the ban proposed by Brussels will target those barrels, phasing out purchases over the balance of the year. While Russia will be able to redirect some of its exports to friendly countries such as India and China, a large portion will be lost altogether, further tightening markets and supporting both WTI and Brent prices.

In terms of technical analysis, after the recent move, WTI is approaching cluster resistance, spanning from $110 to $111.75, where the May high aligns with the 50% Fibonacci retracement of the March/April correction. If this hurdle is cleared decisively, bulls could become emboldened to launch on attack on $116.18/$116.65, the next key barrier corresponding to the March 24 swing high and the 61.8% Fib retracement. On further strength, the focus shifts up to the first quarter peak. On the flip side, if sellers return and regain control of the market, initial support is seen around $105.00, the 50-day simple moving average. Below that, the next relevant floor appears near the psychological $100.00 level (also medium term trendline support).

CRUDE OIL DAILY CHART

Oil Price Forecast: The Fundamental and Technical Backdrop Remains Bullish for WTI

WTI Oil Chart Prepared Using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX





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