Oil Drops to Bargain Hunting Levels

Last week crude oil prices have been trading lower after weaker Chinese economic data reversed the price boost received from Saudi Arabia’s commitment to cut output in July.

This week commenced with a further decline in crude oil prices with West Texas Intermediate dropping to $66.80. Traders are cautious ahead of the Federal Reserve meeting on Wednesday. Although the CME FedWatch tool indicates an 80% probability of the Fed pausing the hikes, investors remain apprehensive about the possibility of resumption next month.

On Tuesday, oil prices rebounded as bargain hunters seized the opportunity to accumulate at lower levels near key support. The impressive drop in U.S. headline inflation was another positive factor boosting the price further.

However, the gains are limited so far due to investor wariness ahead of crucial policy decisions by central banks and muted oil demand recovery from the biggest crude importer – China.

Source: Tradingview

Over the past three months, the price of crude oil has exhibited sideways trading, fluctuating within the range of $63.64 to $81.28. More recently, in the last four weeks, prices have been confined to an even tighter range, oscillating between $66.80 and $75.06.

The daily Relative Strength Index indicator has bounced off its up trend line pointing to likely higher price levels in the short-term. The current set up on the chart suggests a rise to $73.00 – $74.00 could unfold in the coming days. Over the medium-term, price action is likely to continue to trade sideways.

The oil market finds itself entangled in a tug-of-war between two opposing forces. On one side, bearish asset allocators highlight the prospects of monetary contraction, while on the other side, bullish oil speculators anticipate diminishing inventories in the second half of 2023.

Market confidence that demand would surpass supply over the course of the year is waning. For market participants to regain confidence and build long positions, they would likely require substantial inventory declines.

On Tuesday OPEC left its forecast for 2023 global oil demand growth steady for a fourth month in a raw, despite warning that the global economy is facing rising uncertainty and slower growth in the second half of the year. OPEC’s economic growth forecast for 2023 remains unchanged at 2.6%, however the cartel noted that momentum is slowing.

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