Market update: oil price outlook - Brent Crude, WTI ease after decent recovery

China adds further support to the ailing economy

In the early hours of Tuesday morning, it was confirmed that the five-year loan prime rate dropped by more than expected, in yet another show of support for not only the Chinese economy, but for the real estate sector in particular.

Chinese economy is expected to grow by a meager 5% again this year with several concerns still lingering. The real estate sector appears void of confidence especially after a court order to liquidate the large developer, Evergrande and while the rest of the world is battling inflation, China is dealing with the threat of deflation - lower prices year on year.

Nevertheless, the added support did little for oil markets as prices head lower. Concerns around global economic growth persist, as China is a major contributor to oil demand. If doubts around China’s economic recovery persist, this could be seen in a lower oil price.

Brent Crude oil drops at prior swing low, propped up by the 200 SMA

Crude oil prices have put in a phenomenal recovery, rising over 9% from the early February swing low. Price action appears to have found resistance at the $83.50 mark, where prices have since turned lower towards the $82 mark. Cross section may be supported here given that the $82 mark it's followed very closely by the 200-day simple moving average, meaning continued bearish momentum below the long-term trend filter will be required to avoid a period of sideways trading.

The zone highlighted in purple corresponds to the fortunes of the local Chinese stock market, which sold off aggressively, but has since stabilized on the back of state linked investment institutions buying up shares and ETFs in large quantities to restore confidence in the market.

However, $83.50 remains as immediate resistance with the RSI turning lower before reaching overbought levels. Immediate support is at $82.00 followed by the 200 SMA.

Brent Crude oil (UK oil) daily chart

WTI oil oscillates around key long-term trend filter

WTI crude oil is lower on Tuesday and tests a very key level comprised of the 200-day simple moving average, and the long-term level of significance at $77.40. Over the more medium-term, price action trades higher, within an ascending channel, marking a series of higher highs and higher lows.

Should we see further bearish momentum from here, oil prices may look to test the 50-day simple moving average down at the $73.84 mark before potentially making another test of channel support. Oil prices continue to react to global growth prospects which appear to have worsened given that the UK and Japan have already confirmed recessions. In addition, Europe's largest economy, Germany, is said to already be in a recession according to the Bundesbank.

WTI crude daily chart

IG client sentiment reveals narrowing of shorts and longs, distorting signals

• Oil-US crude: retail trader data shows 63.69% of traders are net-long, with the ratio of traders long to short at 1.75 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.
• Positioning is more net-long than yesterday, but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed oil-US crude trading bias.

Oil-US crude client positioning chart

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