Crude oil outlook remains positive despite drop

Crude oil outlook remains supported on OPEC+ supply cuts
Supply fears re Middle East could intensify again
WTI enters key support zone

Crude oil prices have fallen back at the start of the new week, with Brent shedding over 3% and WTI losing 2.3% at the time of writing. In other words, oil prices haven’t moved further higher despite Israel’s increased military operation in Gaza. But prices could easily bounce back as I will discuss in this article.

Crude oil outlook still positive

While the ongoing conflict will keep traders on their toes, they are also wary of the fact that so far, other, oil-producing, Middle East countries have stayed away from getting dragged into the conflict. So far, it has all been verbal warnings and nothing more. For as long as that remains the case, the impact of the ongoing conflict in Gaza on oil prices is going to be limited.

The struggle of crude oil prices over the past couple of weeks have also been due to raised demand fears. These concerns have somewhat outweighed fears about tight supplies and supply-side shocks that could arise if the situation between Israel and Hamas draws in oil-producing nations into the conflict. So far, this has thankfully not happened. But the premium that was built in oil prices on Middle East fears have now been mostly removed.

However, the downside should be limited from here, as oil prices are quite demand inelastic. It is a supply-driven market. Right now, the OPEC and its allies like Russia continue to intervene by withholding supply. This argues against a big drop in oil prices. Until they change tact or non-OPEC supply increases massively, oil prices should continue to find support on any sizeable dips.

WTI Technical analysis

Source: TradingView.com

WTI has now dipped well into that key support zone around $80 to $83.50 area that I have highlighted on my chart in blue shading. Previously, WTI had consistently found strong resistance in this zone. But now that price is testing it from above, we could see the start of a new wave of buying pressure. But traders waiting on the side-lines do need to see a bullish reversal formation before looking for bullish trades.

So, what I would be looking for from a bullish point of view is the formation of hammer-like candle in the above-mentioned zone, ideally in the next day or two, to signal a potential turning point for oil prices. If that happens, then the next area of trouble to look out for would be around $85.50ish, where oil prices have found strong resistance in recent days. A decisive break above that level would put the bears in a spot of bother, potentially leading to a short-squeeze rally.

But if there are no signs of support, then the wait must continue for the bulls. For the bears, well they are probably also in tricky spot to hold onto their positions for long. Just because oil prices cannot find support does not make it a market to short. Given the situation in the Middle East and the OPEC+ ongoing intervention, shorting oil in the current environment is akin to playing with fire. So, I am not even entertaining the idea of it.

Video: Big week for markets

This is going to be a busy week for financial markets with the release of some top-tier data and central bank decisions that could impact a wide range of asset prices, including crude oil.

-- Content created by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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