Chapter 7 09/25 WTI: Focus on Buy the Dips While Waiting for the "Supercycle"
Summary: WTI crude oil retraced from recent gains, falling to around $89.30 in the early Monday New York session. The market anticipates upward support for oil prices as investors focus on tightening supply prospects.
Fundamentals
WTI crude oil briefly rose by 0.7% during the Monday Asian session but continued to decline afterward. However, the current market consensus suggests that the oil supply situation will tighten over the coming months, potentially keeping oil prices elevated.
Since the end of June, oil prices have surged by nearly 30%, marking the largest quarterly gain since March 2022. The surge in oil prices has reignited discussions about the possibility of oil reaching $100 per barrel, while also increasing pricing pressure for importing countries.
Meanwhile, in the backdrop of rising oil prices and reduced volatility, hedge funds have increased their bullish positions to the highest level since February 2022, and JPMorgan has also boosted its forecast for an "oil supercycle."
There are also numerous signs of tightness in the spot market. Russia announced a temporary ban on diesel and gasoline exports last week, driving up fuel prices. Additionally, US crude inventories have once again declined, and the time spread for crude oil is in a contango structure, indicating intense competition for supplies in the near term. With the oil supercycle gaining momentum, oil prices may eventually reach $100 per barrel in the long term.
WTI crude oil this week will receive cues from inventory reports by API and EIA, with a substantial inventory drawdown likely to reassure bulls, signaling sustained demand support. On the other hand, inventory builds could indicate a slowdown in demand or production catching up with consumption.
Furthermore, market sentiment driven by economic data affecting rate hike expectations and recession possibilities could still impact oil and commodity prices, particularly with the release of the US Core PCE Price Index and subsequently China's official PMI data.
Signs of strong inflationary pressures might prompt the Fed to raise rates by 0.25% before the year-end, potentially exerting downward pressure on risk assets like oil.
Technical Analysis
The bullish trend in WTI crude oil prices continues. However, in case of a bearish correction, investors can wait for rebound opportunities around $80.00 and establish long positions. As long as prices continue to form higher highs and higher lows, the overall trend remains bullish.
From a technical perspective, WTI crude oil prices are still trading within a complex head and shoulders pattern intraday, suggesting a potential reversal of the uptrend. Currently, prices are testing the neckline near $90.00.
Breaking below the support at $88.64 could trigger a decline of at least the same height as the pattern, which ranges from $88.00 to $93.00. Currently, the 100 SMA is above the 200 SMA, but the narrowing gap between these indicators is indicative of waning upside momentum and a potential bearish crossover.
The stochastic indicator is in the middle position, indicating the current consolidation, but oscillators seem to point higher, suggesting a return of bullish pressure. On the other hand, the RSI is still trending downward; therefore, prices may continue to follow the downside until oversold conditions are met. In terms of trading strategy, buying the dips near key support is recommended as the primary approach.
Trading Recommendations
Trading Direction: Long
Entry Price: 88.83
Target Price: 93.57
Stop Loss: 87.20
Valid Until: 2023-10-09 23:55:00
Support: 88.61, 88.22, 87.72
Resistance: 90.50, 91.26, 92.26
