Why Crude may be locked within a Range



- By Chinedu Okoye 



A Marginal Rise:

Oil rose for the third week in a row closing at $80.79 and $77.39 for BRENT and WTI respectively. As market conditions continue to support prices beyond levels we targeted for the first half of the year.

Demand is still strong, as the US CPI Data suggests moderating inflation, but a strong consumer nonetheless as labor market continues to stay relatively tight as the US added 256k jobs more than anticipated in December.

US Crude Supply relative to consumptions demand is still low, and this has kept upward pressure on both benchmarks with spreads tighter. However the rise wasn't as steep as last week, where we suggested a pullback, even as we suggested some momentum still holds.

Qe present a technical and fundamental based analytical commentary and outlook below. 



A Technical Review of Price Movements:

The spreads are back within the $3 - $4 range that would suggest a range bound move or pivot going forward. This is supported by the slowing rate of change as seen in the chart below.

CRUDE PRICE MOVEMENTS (at the close from December 20th through January 17th):   
               20/12  |   27/12 |03/01  |10/01   |17/02
BRENT: $72.49 |$74.17 |$76.51  |$79.76 |$80.79
WTI:      $69.46 |$70.60 |$73.96|$76.57   |$77.39
AVG:     $71       |$72.39 |$75.24|$78.17   |$79.09
SPREAD:$3.48   |$3.57   |$2.55. |$3.11     |$3.40

From the chart 1 below you would see a consistent rise in both the Average, and both individual benchmarks. With Crude at its highest level in 3 months. Though the pullback didn't happen at the close, as opined last week, the growth was only marginal. 

(Chart 1: Crude prices in the past 13 weeks)

Chart 2 below shows price changes experienced a deceleration in the week from the week ending January 3rd to this past week. 


(Chart 2: weekly % change)


Crude saw an increase of +3.15% (BRENT) and +4.76% (WTI) at the 03/01, which tightened spreads to  $2.55, it then increased in the next week's close, to +4.25% for BRENT and +3.53% for WTI, widening the spread to $3.11. Spreads would further widen this week even though both benchmarks increased slightly above 1%.

From this, as almost anticipated (per last week's post), Crude seems to have approached market resistance at $76.50 and $79.50 for WTI and BRENT respectively. Whether a pullback is on the cards for the coming week is left to be seen but the moving averages support that theory.

Moving Averages (MA):

The Moving average chart below is in contrast to last week's MA chart, and this suggests a bearish outlook seen as the 20-day MA is less than the 50-day which is also less than the 100-day MA. Last week the opposite was the case.

(Chart 3: 20, 50, 100 & 200 DMA)



Fundamental Review:

Weak China v Strong US Consumer:
The expected weakness in China's Industrial demand, is offset by a stronger US Consumer and restricted supply levels. US Crude output continue to lag consumption demand.

The Challenge Presented by Economic Downturns:
A hard landing or an outright recession, remains the sole conditions for a bear market, absent OPEC+ supply changes, of which there exists no incentive given the relatively high demand in comparison to global supply.

The US Jobs Numbers and Inflation Stats indicate a stable economy, and the VIX is at a low, this usually underscores exoectations of stability. Even though Europe and China is seeing slower economic activities —and growth for the former, the commitment of both the ECB and the PBOC "supporting" markets with more rate cuts, could counteract any slowdowns.

Middle Eastern Tensions:
Geopolitical risks are still a factor m, although a bit nuanced, any fear factor with regards supply disruptions can take BRENT to $100 in quick succession, but the possibilities of that is for the moment slim.



Zero Equilibrium Remarks:

• Crude could see some retracements next week but expected to stay above $76 (BRENT) and $73.50 (WTI), support levels suggested last week.we have t changed from this view, yet even though it is still tentative.

• Though crude is up for the fourth week in a row, the widened spread and the reduced percentage increase on the week suggests market resistance at the $79.50 and $76.50 level above which it might struggle to gain significantly in the quarter.

• Supply continues to be the driving factor, with demand fairly unchanged. Whilst the USD.and China Demand might keep a lid on prices moving far above stated resistance levels for WTI and BRENT.

 • We believe conditions for a pullback are in order.

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