Crude oil reverses hard on improved demand outlook, delivering bullish technical signal

• WTI crude oil bounced over $1 per barrel on Wednesday
• News regarding the demand outlook was far more bullish than prior sessions
• Bullish engulfing candle points to possibility of an extension of the bounce

With a solid US ISM services PMI print and rate cut from the Bank of Canada (BoC) helping to fuel the soft-landing narrative, the rout in WTI crude oil reversed on Wednesday, delivering a bullish technical pattern that points to the potential of further gains ahead.

WTI squeezes on improved demand outlook

Having plunged 10% in five sessions, marking a technical correction, crude was always vulnerable to a squeeze should incoming data not fit the prevailing bearish narrative. That played out perfectly on Wednesday with WTI shooting higher on a noticeably improved demand outlook.

The ISM non-manufacturing PMI revealed the giant US services sector returned to growth in May, driven by business activity improving at the fastest rate in three years.

The headline index jumped to 53.8 from 49.4, hitting highs not seen since August. The figure was above every economist forecast provided to Reuters. The report's business activity index surged 10.3 points to 61.2, the highest level since November 2022. New order growth also accelerated.

Importantly, inflationary pressures eased while employment declined at a slower pace, boosting the prospects for rate cuts from the Federal Reserve and delivery of a soft economic landing which would be ideal for crude demand.

Adding to positivity generated by the ISM report, the Bank of Canada became the first G7 central bank to begin cutting interest rates this cycle, trimming its overnight rate to 4.75% from 5%, the first reduction in four years.

While largely expected by  markets and economists alike, comments from BoC Governor Tiff Macklem following the decision were perceived to be neutral to dovish in nature, keeping the possibility of a follow-up rate cut in July on the table.

Bullish engulfing candle points to upside risks

As seen on the daily chart, the upward thrust helped deliver a bullish engulfing candle, a technical signal that is often seen around market tops and bottoms. While volumes were nothing to write home about on Wednesday, casting some doubt about the sustainability of the bounce, it came on the back of decent volumes in the prior session were bearish move stalled, hinting that buyers may be slowly starting to get the upper hand.

Adding to the bullish technical pattern, the downtrend in RSI has also broken, pointing to a potential shift in momentum. With the price sitting just above $74 per barrel, traders keen to buy the bullish signal could so at these levels with a tight stop below $74 for protection. Possible trade targets include $75.55 or $76.80.

The price action in the coming days will also be scrutinised for longer-term directional risks with WTI remaining well below the 200-week moving average. It had been broken or tested on 14 separate occasions since early 2023 without ever closing below it prior to this rout, making Friday’s close an important one from a market psychology perspective.

-- Written by David Scutt

Follow David on Twitter @scutty

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