CRUDE OIL PRICE OUTLOOK:
- Crude oil prices soared to above $94 bbl as the US warned about an imminent Russian invasion of Ukraine
- This may add supply constraints to an already tight market, bringing the $100 mark in sight
- Oil prices are trending higher within an “Ascending Channel”, underscoring a strong upward trajectory
Crude oil prices extended higher during Monday’s APAC mid-day session after soaring 4.3% on Friday. WTI is trading near $94 bbl, and Brent is above $95 bbl. Prices are driven by intensified Russia-Ukraine tensions after US National Security Adviser Jake Sullivan said on Friday that an imminent invasion is possible. A flurry of diplomacy over the weekend failed to calm investors, even though Moscow denied that it plans to attack its neighbour.
Investors remained jittery about a potential military invasion, which may lead to US and European sanctions and add supply constraints in an already tight market. Ukraine is a key transit hub for oil and gas between Russia and the European Union, transporting 11.9 million metric tons of crude oil between them in 2021, according to S&P Global. A deteriorating situation may disrupt this crucial line of supply and push oil prices even higher, whereas eased tensions may result in the opposite.
On the demand side, the DOE reported that US crude oil inventory unexpectedly fell by 4.756 million barrels last week, whereas market had anticipated a small build. This points to strong demand for energy as the economy gradually exits from Omicron-related restrictions. Total US commercial crude inventories have been falling over the past few months, underpinning prices (chart below). Meanwhile, Asian importers have been paying higher premiums for spot cargos, showing rising physical demand.
WTI Crude Oil Price vs. DOE Total Crude Inventory
Source: Bloomberg, DailyFX
On the supply side however, OPEC+ appeared to be reluctant to ramp up supply to meet its output target. The International Energy Agency estimated that the gap between OPEC+ output and its target widened to 900k bpd in January. Earlier this month, the oil cartel’s commitment to increase supply by 400k bpd in March doesn’t seem to be sufficient to ease market concerns about a widening disparity between supply and demand.
Crude oil prices have rallied for eight consecutive weeks, riding the tailwind of supply-demand imbalances, insufficient OPEC+ output increase and heightened geopolitical tensions. Some negative catalysts include ongoing Iran nuclear talks, which may reignite hopes for more Iranian supply to the market should the Middle Eastern country and world powers make progress towards reviving the 2015 de-nuclearization agreement.
Technically, WTI is trending higher within a “Ascending Channel” as highlighted on the chart below. The upper and lower bound of the channel may be viewed as immediate resistance and support levels respectively. A key resistance level can be found at around $94.60 – the 261.8% Fibonacci extension. Breaching this level will expose the psychological resistance level of $100. The MACD indicator is trending higher above the neutral midpoint, suggesting that prices riding a strong uptrend but may be vulnerable to a technical pullback.
WTI Crude Oil Price – Daily Chart
— Written by Margaret Yang, Strategist for DailyFX.com
To contact Margaret, use the Comments section below or @margaretyjy on Twitter