Crude oil forecast: WTI turns positive, snapping 3-day fall

Crude oil prices turned high on the session, with Brent finding good support from $84.00 and WTI around $80.50. If the gains can be sustained into the close, oil prices will snap a three-day sell-off. The recovery seems to have been driven by expectations that oil market will tighten later in the year, after another bigger-than-expected drawdown of US oil stocks was reported by the US Department of Energy earlier. Prior to the recovery in the second half of the day, oil prices were looking quite bleak, threatening to fall for a fourth consecutive day. Those declines were partly driven by the milder-than-expected impact of a US hurricane and after recent global economic data dampened oil investors’ expectations for demand growth. However, some forecasters, including the Energy Information Administration (EIA), still anticipate higher oil prices due to slower output growth. We share this view and believe oil prices will rise further in the second half of the year as the market tightens. Therefore, our crude oil forecast remains bullish.

Crude oil stocks fall more than expected

Earlier today, we saw the latest crude oil stockpiles data from the US Department of Energy's Energy Information Administration (EIA) come out better than expected:

• Crude stocks -3.443MM, Exp. +1.0MM
• Gasoline -2.006MM
• Distillates +4.884MM
• Cushing -702K
• SPR +477K
• Production 13.3MMb/d +100k

Crude oil had already bounced off its lows before the latest US oil inventories data came out, and so prices didn't show any material reaction in immediate response. However, a couple of minutes afterwards when investors digested the data, prices broke above $81.50, which then gave rise to further technical buying above that level.

The muted initial response was partly because the American Petroleum Institute (API) had already estimated yesterday that there would be a bigger-than-expected drawdown in oil stocks.

Crude oil forecast: Bullish trend remains intact

In any event, the bullish trend remains intact and if we see a positive close today around the $80.00-$81.50 support area, then this would bode well for the trend followers as we head into the business end of the week.

WTI has been testing a key support area in the last couple of days following its recent drop.

Source: TradingView.com

Prices have been testing support around the upper end of the $80.00 - $81.50 area, which had been resistance in the past.

I am expecting prices to rebound around this key support area given the bullish price structure of crude oil over the past several days. If so, another test of the bearish trend line dating back to September 2023 should not come as a surprise, around the $84.00 area.

The crucial support level is now around $80.00, which is the most recent low before the latest rally. If WTI breaks below this level, it would invalidate its still-bullish technical outlook. However, my base case scenario suggests that we could see a recovery from the current levels.

So, as things stand, I maintain a bullish crude oil forecast for the reasons stated above.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R