Market update: oil attempts recovery with key level in sight

EIA storage data reveals minor drop, but extends run of successive drawdowns

The Energy Information Agency (EIA) reported another storage drawdown in Cushing Oklahoma, but the latest drop was minor. Nevertheless, it extends the run of drawdowns to five successive prints but has struggled to meaningfully propel oil prices higher. Drawdowns imply that demand for oil remains strong, and in some cases, may be increasing. This is typically positive for oil prices.

Oil responding positively to improvements in the battered Chinese equity space

Oil markets have struggled to advance in 2024 thus far, weighed down by concerns around the worsening global economic outlook. Europe has dodged a technical recession by the narrowest of margins, and China struggles to fend off widespread deflation and a beleaguered property sector.

However, recent action from Chinese officials suggests a step up in urgency to right the ship, with the most recent decision to replace the head of the securities regulator, seeing early gains in Chinese indices early in the Asian session.
State-linked investors are said to be propping up the equity market, in an attempt to halt the decline, and this has seen a partial recovery which mimics the recent fortunes of the oil market.

The chart below depicts Brent crude oil prices falling, and then picking up again – in similar fashion to the Chinese SSE Composite (highlighted in purple). Greater urgency from Chinese officials to support the economy appears to be helping sentiment in the oil market but the positive correlation, admittedly, is over a very short time frame.

Brent crude tests the 200-day simple moving average (SMA) before the $82 mark and potentially even $83.50 but a stronger US dollar may begin to weigh on upside potential, especially is incoming US fundamental data continues to outperform. Support appears at $77.

UK oil (brent crude) daily chart

WTI nears zone of resistance

WTI prices attempt to trade back around the confluence zone of the long-term $77.40 level, and the 200 SMA. Oil prices continue to trade within the ascending channel (blue) which has encapsulated the majority of price action since late 2023. Support appears at the intersection of the $72.50 mark and channel support.

US oil (WTI) daily chart

Recent shifts in positioning complicate guidance from a contrarian indicator

Oil- US crude: retail trader data shows 75.36% of traders are net-long with the ratio of traders long to short at 3.06 to 1.We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests oil US crude prices may continue to fall. However, changes in recent positioning complicates the analysis and plays a big role in arriving at the eventual bias for oil.

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