Crude Breaks into New Territory

- By Chinedu Okoye 

The New Year Breakout:

Crude powers on in the week crossing into the new year on a two consecutive weekly gains at the close. Demand stays relatively high as "consumer patterns" as pointed out in our Outlook for Q1 2025, and supply stays muted.

Crude may be headed for a breakout past the previous 10-week range to settle at a higher support - resistance levels. A new range would be determined –where necessary after the first four weeks of the trading year (i.e., through January 31st).

Both technical and fundamental (macro) indicators we watch suggest Oil prices may stay elevated —or maintain a higher support and resistance level— throughout the quarter and through to the end of Q2.

Technical Analysis: Spreads, Benchmark and Moving Averages:

We dig into the data with a broad-scale analysis on the sentiments in the market, highliting directional movements in the both benchmarks, and attempting to interpret the price moves, using spread and moving averages.

(Crude at the Trading Week's Close from October 25th, 2024 - January 3rd, 2025)

At $76.51 (BRENT) and 73.96 (WTI), Crude is now at a 3 months high, as both benchmarks surpass the 25th October high where BRENT hit $76.04, and WTI $71.10, as it remains highly bid as the BRENT-WTI spread is below $3. 

Spreads show a tightening from the $3 - $4 range as US Supply lags demand absent a change in OPEC+ focus from prices to market share, which could increase supply and put a lid on prices. As a result oil could stay above previously set resistance levels ($73 for BRENT, $69 for WTI).

CRUDE PRICE MOVEMENTS (at the close from December 6th through to January 3rd):

                  06/12 | 13/12 | 20/12   |27/12  |03/01

BRENT: $71.12| $74.49| $72.94 |$74.17 |$76.51

WTI:      $67.20 |$71.29 | $69.46|$70.60 |$73.96

AVG:     $69.16 | $72.89| $71      |$72.39 |$75.24

SPREAD: $3.92 | $3.20  | $3.48.  |$3.57   |$2.55

A spread widening to above $3 would signal a cool off in the markets and possibly a return to the previous range. However, where the spread holds below $3 and prices stay above $73 on average, in the next two trading weeks, a tentative adjustment to the technical levels would be made.

Moving Averages:

Simple (as well as exponential) moving averages show a clear bullish trend in both benchmarks, as it broke out our set support - resistance levels. Bulls have gradually taken up the market, over powering bears to break resistance.

           BRENT     •   WTI

20-day:        $76.46     •  $73.91

50-day:        $76.14     •  $73.45

100-day:      $75.71     •  $72.98

200-day:      $74.82     •  $72.02

The tight spread and a higher average further indicates that some strenght may be to come, or at least that the market could support prices at a higher level than previous months. This is also supported by the macroeconomic indicators we suggested in our 2025 Outlook —strong consumption.

Fundamental Analysis: The Key Macro Trends Impacting Oil Prices

As a major Oil producer, and given that OPEC output is unchanged, market dynamics in the United States affect overall prices of oil.

Below we explain the reason for the relatively higher increase in crude from last week's (27/12/2024) close, as a function of a higher demand relative to supply, in the States as the US Consumer strenght holds up going into the year.

Demand Outweighs Supply:

US oil supply though increased to record levels with October Figures at 13.7 million barrels per day (bpd), US Oil consumption in the same month was 21 mbpd suggesting demand is keeping up with, or outpacing production levels.

Though IEA report suggest production to increase in 2025, strong consumer patterns (as suggested in our outlook for Q1 2025), continue to offset supply, leading to a tighter spread as both BRENT & WTI rise in the week.

US Crude Invetories:

For the week ending December 27, 2024 US crude oil invetories decreased by 1.2mb to 5% below its five-year average at 416.6 million barrels. This is perhaps the strongest tailwind for Oil, followed by European demand amidst a steonger US Dollar.

Core inflation could determine if these levels can be sustained as lower prices (excl. Food and Energy), would somewhat support energy spending that drives oil. And is a major indicator for us in this regard. 

Some bearish sentiments are a stronger US Dollar, and a weaker China but a lot depends on US and OPEC supply levels. 

The above forms the basis of our remarks and expectations for the week and through to the end of the next quarter.

Zero Equilibrium Remarks and Expectations:

Though expectations for the quarter and the next remain bullish, we expect some retracement in the coming week, albeit a mild one, as crude finds a new range which remains subject to change in an upward direction.

In that scenario, $75 (BRENT) and $73 (WTI), could be new resistance levels for both benchmarks, as large drawdowns are expected to be followed by sharp retracements.

Our price targets for H1 2025 remain $80 and $75 for BRENT and WTI respectively.