Crude oil outlook: What now after a volatile two weeks?

• Crude oil outlook: No ceasefire in Israel-Hamas war
• Middle East conflict remains at forefront of investors’ minds
• Improving demand outlook should limit downside
• Crude oil technical analysis

Crude oil outlook: No ceasefire in Israel-Hamas war

Oil prices posted about a 7% weekly loss a week ago. But by Friday afternoon trading, when this report was written, crude had recouped much of those losses. Prices were now up around 5% on the week, with Brent oil trading around its 200-day moving average at $81.50. Oil investors were clearly spooked by signs that an imminent ceasefire in the Israel-Hamas conflict may not happen after all, unfortunately. It was hopes over a ceasefire behind much of the previous week’s selling.

Crude oil outlook: Middle East conflict remains at forefront of investors’ minds

Crude oil prices remain quite sensitive to the developments in the Middle East, and it appears as though nothing else matters too much. There is a lot going on in the region, but there is still the outside chance of a ceasefire. The situation remains tense and this could keep oil prices volatile. Questions remain as to how much the risk premium should be attached to the Middle East situation, because so far oil supplies have not yet been directly impacted much by crisis, apart from re-routing of the ships around the African continent, which, if anything should be adding to the cost.

Therefore, even if there is a ceasefire, the downside for oil could be limited to around 5-7 percent, I reckon.

What about demand outlook for oil?

Right now, there are conflicting signals from around the world, with the US continuing to outperform and the rest of the world lagging behind. In particular, it is China where the main source of worry is, although the Eurozone might have a thing or two to say about that, too.

But with Chinese markets closed for Lunar New Year holidays, we won’t get much in the way of data to gauge the strength of demand from the largest importer of oil and second largest consumer.

However, there will be plenty of data from the world’s largest consumer of oil, the US, to provide us indications about demand.

While CPI is probably the most important macro data for FX and stock market investors, it will probably not have a very large impact on the direction of oil prices, given that oil is less sensitive to the volatility in the dollar compared to, say, gold. A very large dollar reaction, if seen, would not go unnoticed by oil traders, however.

Once CPI is out of the way, on Tuesday, oil investors will turn their focus on signals about health of the US consumer: Retail sales data will come in on Thursday. Recently, we have seen several forecast-beating retail sales figures. In fact, they have beaten expectations in each of the last 6 months. In December, retail sales rose 0.6%, while core sales climbed 0.4%. The stronger retail sales numbers have been accompanied by rising consumer sentiment in the last few months. Correspondingly, the unemployment rate has stayed low, wages growth high and inflation slow to come back down.

If we see further signs of strength in US economy, then, all else being equal, this should help to support oil prices.

Crude oil outlook: Technical levels and factors to watch on Brent

Crude oil bounced back on Monday and has not looked back since, with prices staging an impressive 3% rally on Thursday to further eat into last week’s near-7% drop. With most of those losses now recouped, and Brent moving into the positive territory again for the month, it looks like traders are eager to push prices higher. Standing on the way of a clean recovery is the 200-day average, which is flat-lining around the $81.50 area. With both the bulls and bears having genuine reasons to move prices in their favour, there is little surprise that we have seen Brent oil consolidate around this average for the past several months. But a daily close above it could pave the way for at least further short-term gains in early parts of the week ahead. A potential run towards $84.00 resistance could get underway if there is still no ceasefire when the trading gets underway.

Looking at the weekly chart of Brent, well on this time frame, you can see that prices are trying to form what looks like a long-term bottom.

In January, crude ended a 3-month losing streak, which means the longer-term bearish trend that started in April 2022, following the Russian invasion of Ukraine, may have ended. Since prices bottomed at just under the $70 handle in March last year, we have now seen several higher lows form, with a few taking place during last summer, then another one in December at $72.35. Since the December low, we have now seen a few interim higher highs and higher lows, although prices are yet to make a clean higher high above September’s peak at $95.26. So, at worst, it looks like the long-term bear trend is over. At best, the start of a new long-term uptrend could be underway.

Source for all charts used in this article: TradingView.com

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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