Market update: IEA lowers demand growth estimate, oil recovery slows

Marginal Cushing stock build could limit oil upside

US oil stocks in Cushing Oklahoma rose slightly at the end of last week, which may cap oil upside towards the end of this week. Oil storage figures have recovered in February after January witnessed multiple drawdowns. Storage figures are just one part of a multi-factor fundamental mix that is in play at the moment. One of the major determinants of the oil price is the concern around the global economic outlook, particularly as the UK and Japan confirmed their respective economies entered into a recession in the final quarter of 2023.

Europe’s economy has narrowly avoided a technical recession, while Chinese authorities are desperate to reverse the deteriorating investor sentiment and stock market malaise. A significant proportion of oil demand growth comes from China each year, but with another year of sub-par economic growth forecast for the world’s second largest economy, the potential for oversupply plagues the oil market.

EIA and OPEC forecasts for oil demand growth are diverging after the International Energy Association (IEA) revised its estimate lower, from 1.24 million barrels per day (bpd) to 1.22 million bpd. Meanwhile, OPEC on Tuesday maintained its loftier 2.25 million bpd estimate, highlighting the increasing uncertainty around global supply and demand dynamics.

Brent crude oil flirts with the 200-day SMA

The Brent crude chart below shows the oil market’s V-shaped recovery (highlighted in purple) as the commodity’s price tracked the Chinese stock market before the week-long Lunar New Year Holiday.

Oil prices appear to have found resistance around $83.50 but are yet to close above the recent swing high of $84. In recent trading sessions, oil has recovered from a sharp decline which occurred around the same time the Chinese stock sold off rapidly.

In the absence of a further bullish catalyst from here, prices may consolidate or head lower. The price at $83.50 has proven difficult to overcome since the end of last year, suggesting a return towards $77 is not out of the question.

Brent crude daily chart

WTI testing major zone of resistance into the end of the week

US crude, like Brent, also finds itself surrounded by resistance. In this case, it is the intersection of the major long-term level of $77.40 and the 200-day simple moving average (SMA). A daily close above this marker highlights channel resistance. If resistance proves too tough to conquer, prices may continue to oscillate within the range by heading towards channel support and $72.50.

WTI daily chart

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