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Weekly Oil Outlook-27-03-2024

Current Factors Influencing Current Crude Oil Prices:
  • Oil prices experienced a second consecutive day of decline on Wednesday, prompted by reports of a significant increase in crude stockpiles in the United States, coupled with indications that major oil producers are unlikely to revise their output policy at an upcoming technical meeting.
  • Brent crude futures for May delivery dropped by 80 cents, equivalent to a 1.1% decrease, settling at $85.40 per barrel . 
  • U.S. West Texas Intermediate (WTI) crude futures for May delivery fell by 70 cents, or 0.9%, to $80.78.
  • Despite reaching their highest levels since October last week, oil prices have retreated this week, remaining approximately 2.7% above the average closing price in the first week of March.
  • The recent decline in oil prices can be attributed to a sharp increase in U.S. crude inventories and expectations of potential inaction by OPEC+ regarding its output policy next week. Profit-taking accelerated following a strong rally in mid-March.
  • According to market sources citing American Petroleum Institute figures, U.S. crude oil inventories rose by 9.3 million barrels in the week ended March 22. Additionally, distillate inventories increased by 531,000 barrels, while gasoline stocks fell by 4.4 million barrels.
  • Official government data on U.S. crude inventories is scheduled to be published on Wednesday at 10:30 a.m.
  • OPEC+ is unlikely to make any changes to its oil output policy until a full ministerial gathering scheduled for June, as per information from three OPEC+ sources ahead of an upcoming meeting next week.
  • Earlier in March, OPEC+ members agreed to extend their output cuts of approximately 2.2 million barrels per day until the end of June.
  • Russia has instructed companies to reduce their output to comply with the target, while Iraq’s oil ministry announced on March 18 its intention to reduce exports to offset earlier overproduction.
  • The ability of OPEC and OPEC+ to adhere to output cuts has been questioned following reports of overproduction by OPEC members. Iraq exceeded its targets by 190,000 bpd in February, according to a Reuters survey.
  • ANZ analysts highlighted that Iraq, among other OPEC+ members, has admitted to overproducing in recent months, noting that traders are monitoring OPEC members for any indications of alterations to production quotas.

Technical and Fundamental Analysis

Chart Overview and Price Action

Technical Analysis:

  1. Price Action: WTI is currently exhibiting signs of a pullback within an overarching bullish trend, with the recent price movements falling into a bearish consolidation pattern between $79.90 to $78.12.

  2. Support and Resistance:

    • Immediate Support: Stands at $79.70, just above the psychological level of $78.120. This is reinforced by the previous consolidation area.
    • Secondary Support: Identified at $78.90, aligning with the bearish consolidation zone.
    • Resistance: The initial resistance is at $82.03, followed by a stronger resistance zone around $83.87 to $80.104.
  3. Fibonacci Levels: The retracement from recent highs suggests near-term support near the 1.272 extension level at $83.909 and resistance at the 1.618 level of $87.133.

  4. Moving Averages: The price is hovering around the Bollinger Band mid-line, suggesting a potential for either direction depending on upcoming catalysts.

  5. Momentum Indicators: ATR is showing reduced volatility, and momentum indicators suggest weakening bullish momentum, signaling a cautious market.

Fundamental Analysis:

  1. US Inventory Surge: The significant increase in U.S. crude stockpiles is a bearish development, hinting at potential oversupply or waning demand.

  2. OPEC+ Policy Stability: The lack of policy change expectation from OPEC+ may curb volatility, but adherence issues may inject some uncertainty.

  3. Russian Compliance: Russia’s moves to comply with OPEC+ cuts are bullish, indicating supply-side control, but overproduction by members like Iraq adds bearish pressure.

Scenario Forecasts:

  1. Bullish Scenario (35% Probability): If OPEC+ compliance is tighter than expected, overshadowing the inventory builds.

    • Price Targets:
      • First Target: $82.03 (immediate resistance)
      • Second Target: $83.909 (Fibonacci 1.272 extension)
      • Stretch Target: $87.133 (Fibonacci 1.618 extension)
  2. Bearish Scenario (40% Probability): High U.S. inventory levels and compliance issues could push prices down.

    • Price Targets:
      • First Target: $79.70 (immediate support)
      • Second Target: $78.120 (major psychological level)
      • Stretch Target: $76.646 (Fibonacci 0.5 level)
  3. Neutral Scenario (25% Probability): Market balances inventory data with OPEC+ policy anticipation, leading to sideways trading.

    • Price Targets: Fluctuation within the $79.90 to $78.12 consolidation range.

Overall Market Sentiment:

  • Positive: 35% driven by potential adherence to OPEC+ cuts and geopolitical risks.
  • Negative: 40% due to the recent build in U.S. inventories and possible non-compliance with production quotas.
  • Neutral: 25% reflecting market indecision ahead of official inventory data and the OPEC+ meeting outcome.

Market sentiment is dynamic, and upcoming events such as the OPEC+ meeting and official inventory reports are critical. Real-time monitoring of these developments is essential for adjusting forecasts and strategies.

Price analysis and Targets:($82-$76)

We have two primary scenarios to consider, each with distinct price targets reflecting potential market movements. Given the current West Texas Intermediate (WTI) crude oil price of $80.75, let’s dissect the possible paths:

Bullish Scenario
  • Bullish Targets: $82.03, $83.90.
  • Price Path: For prices to reach the bullish targets, the market must absorb the inventory data positively, possibly due to tighter-than-anticipated OPEC+ compliance or unforeseen geopolitical risks. The price needs to climb by $1.28 to hit the first target, then by an additional $1.879 to reach the second, and significantly more to hit the stretch target.
  • Probability: 35%, suggesting less confidence in this outcome relative to the bearish scenario.
Bearish Scenario
  • Bearish Targets: $79.70, $78.120, and a stretch target of $76.646.
  • Price Path: To move towards the bearish targets, the market must react negatively to the U.S. inventory levels and potential OPEC+ non-compliance. The price would need to decrease by $1.05 to hit the first target, then by a further $1.58 to reach the second, and even more for the stretch target.
  • Probability: 40%, indicating a slightly higher likelihood of this outcome compared to the bullish scenario.
Neutral Scenario
  • Probability: 25%, with prices oscillating within the $79.90 to $78.12 range, indicating indecision and balance between supply-demand dynamics and geopolitical influences.
Strategic Recommendation

Given the mathematical distribution of probabilities and potential price movements, a mixed strategy that prepares for both bullish and bearish outcomes might be advisable, leveraging the concept of mean reversion within the context of these scenarios. This involves a bifurcated approach:

  1. Positioning for the Bearish Scenario: Considering the slightly higher probability of the bearish scenario and the current price’s proximity to the bearish targets, initiating a short position or protective puts could be prudent. This position can hedge against potential declines, particularly if the bearish scenario unfolds due to high inventory levels and OPEC+ compliance issues.

  2. Preparing for a Bullish Reversal: Given the volatility and the possible bullish scenario’s emergence (35% probability), maintaining a portion of the portfolio in long positions or calls could capture upside movements. This is particularly relevant if unexpected compliance or geopolitical tensions drive prices towards the bullish targets.

  3. Stop-Loss and Take-Profit Points: Implementing stop-loss orders slightly below $78.12 and take-profit orders around the bullish targets ($82.03 to $83.909) can manage risks and secure gains.

  4. Reassessment: Continuously monitor the market for signals of a stronger move towards either scenario, particularly around the release of official inventory data and the OPEC+ meeting outcome, to adjust the strategy accordingly.

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Disclaimer: This is not an Investment Advice. Investing and trading in currencies involve inherent risks. It’s essential to conduct thorough research and consider your risk tolerance before engaging in any financial activities.