Oil traders have seen oil moving in a sideways range for the past three months. As the price rallies towards the range highs, we look at what could drive a breakout.
- Oil demand is improving: China’s re-opening is crucial
- The outlook for oil supply is less clear: Russian production levels have been higher than anticipated.
- Technical analysis: There are crucial technical analysis indicators we are looking at on the chart that will signal moves towards a breakout.
The drivers of oil are pointing towards a price recovery
Traders that consider the outlook for oil are broadly looking for two factors:
Supply – is supply increasing (negative for the oil price), falling (positive for the oil price) or staying the same?
- Demand – is demand increasing (positive for the oil price), falling (negative for the oil price) or staying the same?
How the two factors of oil demand and supply interact will drive the longer-term outlook for the commodity.
Oil demand is improving as China re-opens
In 2022, markets were fearful of the impact that aggressive increases in interest rates around the world would have on the global economy.
After spiking higher in the immediate reaction to the war in Ukraine, oil fell decisively in 2022.
Into 2023, there is uncertainty over how high central banks will take interest rates and the impact on the global economic slowdown.
However, this comes with one crucial difference. China’s economy has fully re-opened after ending its self-imposed zero COVID policy.
China is the world’s second-largest consumer of oil, taking around 13% of total daily global consumption.
China fully up and running again will boost oil demand. According to US EIA (Energy Information Agency) forecasts, China’s re-opening will boost demand by +0.7m barrels per day (bpd).
Oil supply remains steady
Oil demand looks to be rising, but oil supply is remaining fairly steady.
According to EIA forecasts, any increases in OPEC oil production will be offset by the 1.1m bpd decline in Russian production.
However, the key will be in Russian oil production. Russia produced more oil than expected in January and if this continues, this could weigh on prices.
The EIA expects Brent Crude oil to average $85 in the first half of 2023 - which is slightly above the current average price of $83.90.
So there are two big questions about the direction of the oil price:
- Does Chinese demand increase decisively?
- Does Russia increase production more than expected?
If the answer to question 1 is greater than question 2, then this helps to support the black gold price over the medium term and potentially drives the price higher.
Technical analysis shows near-term improvements
So for a nearer-term outlook on the oil price, we look at the technical analysis. The chart analysis helps us to get more of a view of the day-to-day price moves.
Our analysis suggests that the resistance of the range is coming under pressure.
Brent Crude Oil (UKOUSD)
The outlook is improving, but more is needed to signal a breakout.
The resistance between $86.85/$90.00 has continually blocked upside moves in the past three months.
Despite this though, there is still a positive near-term outlook within the range.
- A run of higher lows since the December low of $75.50 has formed a shallow uptrend.
- Near-term moving averages (the 21 and 55-day moving averages) are both rising for the first time since June 2022.
Momentum on the daily Relative Strength Index (RSI) is near-term positive (above 50) but needs to be consistently above 60 to suggest a building upside move.
The recent reaction low at $82.50 suggests that near-term weakness is seen as a chance to buy for a test of the resistance above $86.85. The price closing above $86.85 would further improve the near term outlook.
However, for a decisive medium-term breakout, Brent Crude oil would need to be consistently trading above $90. That would then open the door to potential moves towards $100.
Losing the support of the first important higher low at $80.50 would lose the positive outlook within the range.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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