Crude oil analysis – February 21, 2024

• Crude oil analysis: Technical levels and factors to watch on Brent
• Global PMIs and crude inventories could provide catalyst for breakout
• Rising US stockpiles and dollar strength holding back crude for now

Crude oil has been unable to build on the gains made in in the previous couple of weeks, with Brent oil falling back below the 200-day average at $81.70. Still, judging by what I consider as constructive price action in the last few weeks, a bullish breakout may still be on the cards as we head towards the second half of the week.

Before discussing the macro factors further, let’s have a quick look at the chart of oil…

Crude oil analysis: Technical levels and factors to watch on Brent

Source: TradingView.com

Key support on Brent oil is shaded on the chart around $80.60 to $81.70 area, where it was trading at the time of writing. We have seen both support and resistance in this zone, where also have both the convergence of the 21- and 200-day moving averages. The bulls will need to hold their ground here, if we are to finally see a clean break above the $83.00 level, where oil has found consistent resistance in the last few months. If and when $83.00 is taken out, a continuation to $85.00 may well be the outcome.

However, if the abovementioned support breaks down, then this will complicate the near-term technical outlook. In this scenario, a possible break back below $80.00 could be the outcome. However, this is not my base case scenario.

Crude oil analysis: Global PMIs and crude inventories could provide catalyst for breakout

The return of Chinese markets has injected liquidity into some sections of the financial markets. Chinese stocks and copper have both gained ground so far this week, although crude oil is yet to receive any meaningful support from this source. Nvidia's earnings result tonight could impact risk sentiment, but the impact on crude oil is likely to be limited.

More to the point, the key focus area for oil traders will be Thursday's release of global manufacturing and services PMIs, particularly those from Germany and the Eurozone, where economic growth has been largely non-existent.

The PMI figures will offer insights into the well-being of key developed economies, several of which heavily rely on oil imports. Should the PMI data reveal unexpected robustness, it could bolster oil prices by indicating potential demand strength. Conversely, if PMI data shows weakness, it might trigger concerns about recession, consequently dampening oil prices.

Meanwhile, the US weekly crude oil inventories report will be delayed by a day due to the Monday bank holiday, shifting from Wednesday to Thursday. After rising by 5 and 12 million barrels in the last couple of weeks, let’s see what the latest data reveals about stockpiles situation.

Rising US stockpiles and dollar strength holding back crude for now

In recent weeks, the oil market has been in consolidation mode inside relatively large ranges. The strength of the US dollar has been playing a significant role in this fluctuation, keeping a lid on any breakout attempts. Despite positive factors such as ongoing interventions by OPEC, geopolitical tensions in the Middle East, and optimism surrounding potential economic improvements in China, we haven’t yet seen a clean breakout.

There’s also been some less-than-bullish reports on US oil inventories. The Energy Information Administration (EIA) reported a sizeable 12.0-million-barrel increase in crude inventories last week, surpassing expectations. This followed a similarly concerning 5.5-million-barrel increase in the preceding week. The rise in inventories was primarily attributed to lower refinery utilisation rates, resulting in a consecutive decline in gasoline stocks and pushing them below their 5-year average. While this inventory build may raise concerns about either decreased demand or increased supply, the possibility of seasonal maintenance affecting refinery operations is something to consider, too.

Despite these challenges, the overall outlook for oil remains cautiously optimistic. There are not many significant negative influences beyond the factors mentioned. However, given the flagging momentum, we will need to see a fresh technical bullish signal now.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R