Chapter 31 09/08WTI: How to Choose Between Consumption Attributes and Risk Attributes?
Summary: EIA data shows that as of the week ending September 1st, excluding the Strategic Petroleum Reserve, U.S. commercial crude oil inventories have decreased by 6.307 million barrels to 417 million barrels, marking the lowest level since the week of December 2, 2022.
Fundamentals
The EIA data released on Thursday indicates that U.S. commercial crude oil inventories, excluding the Strategic Petroleum Reserve, dropped by 6.307 million barrels to 417 million barrels as of the week ending September 1st, hitting the lowest level since December 2, 2022. The Strategic Petroleum Reserve (SPR) inventories increased by 798,000 barrels to 350.3 million barrels, the highest since the week of June 9, 2023.
On the supply side, the four-week average supply of U.S. crude oil products stands at 21.115 million barrels per day, an increase of 4.89% compared to the same period last year, while crude oil production remains unchanged at 12.8 million barrels per day. Crude oil exports from the U.S. increased by 404,000 barrels per day to 4.932 million barrels per day, and commercial crude oil imports reached 6.77 million barrels per day, up by 153,000 barrels per day compared to the previous week.
Despite a significant drop in U.S. inventories, crude oil futures ended a ten-day winning streak on Thursday. Meanwhile, the two major benchmark crude oil indices are expected to see substantial weekly gains, and with global energy markets tightening, they could potentially rise further.
Earlier this week, Saudi Arabia and Russia announced an extension of production cuts for the remainder of the year, adding pressure to an already tight international energy market. If the global economy avoids a recession, the market believes that oil prices could return to $100 per barrel.
However, the subdued performance of the Chinese economy has restrained the rise in crude oil prices. The country has performed poorly following the pandemic, raising concerns that this weakness could permeate the broader energy market.
In the market context, crude oil prices have been a focal point in the commodities space since reaching new highs in August (September futures). Technical prospects have shifted from the previous range-bound pattern between $60.00 and $80.00 to a bullish outlook. The extension of production cuts by Saudi Arabia and Russia continues to be a major driver for the recent resurgence in oil prices.
Nevertheless, the strengthening U.S. dollar has also exerted pressure on crude oil prices. The U.S. Dollar Index, measuring the dollar against a basket of currencies and commodities, has been steadily climbing since July 18th, reaching 105.00. This is unfavorable for dollar-denominated commodities as it increases the cost for investors.
Indeed, crude oil possesses characteristics beyond being a mere consumable, it still carries attributes of a risk asset. A significant increase in oil prices, as a risk asset, can boost the U.S. dollar, making it stronger against G10 currencies. This is of significant importance.
Another factor driving the strength of the U.S. dollar is its relative economic strength, particularly in contrast to the continued weakness in Europe and China. However, if rising oil prices once again push up inflation, the Fed may have no choice but to raise key interest rates, supporting the U.S. dollar and suppressing prices of dollar-denominated commodities.
Technical Analysis
WTI crude oil remains bullish within the daily timeframe, but indicators continue to show overbought conditions, implying the possibility of a correction in the coming trading days. The relative strength index (RSI) is above 70 and has a negative slope, while the moving averages convergence suggests that prices are still in a range-bound pattern.
In a broader context, crude oil prices are still above the 20, 89, 100, and 200-day SMAs, indicating that the bulls maintain a strong grip on the situation.
In the event of increased bearish pressure, the first support level is at $85.50, and the second support level is at $84.05, which is identified as correction support.
On the resistance side, the first resistance level is at $87.15, representing overlapping resistance levels aligned with the 161.80% Fibonacci retracement and the 61.80% Fibonacci retracement. The convergence of Fibonacci levels increases the significance of this as a potential resistance zone.
Furthermore, the second resistance level at $89.26 is considered significant as it represents overlapping resistance, potentially acting as a strong barrier to further upside price movement. The final resistance level is at $90.00, a psychological level, which may trigger a significant number of stop-loss orders.
Overall, as previously mentioned, the price has reached a critical juncture, and crude oil's current attributes are no longer purely consumable; it leans more toward being a risk asset. With this characterization in mind, the market is likely to lean toward the right. In terms of trading strategy, buying the dips is recommended as the primary approach, with psychological levels as key reference points.
Trading Recommendations
Trading Direction: Long
Entry Price: 86.30
Target Price: 90.50
Stop Loss: 84.20
Valid Until: 2023-09-22 23:55:00
Support: 85.50, 84.52, 84.28
Resistance: 87.55, 87.93, 89.29
