Crude oil outlook: WTI shrugs off stockpiles data as growth concerns linger

Crude oil was trading lower at the time of writing, hovering above the $70 support level. It was trying to consolidate yesterday's gains, when optimism from Chinese stimulus measures sent prices of all commodities higher. Today’s weakness suggests demand concerns linger, even as concerns over potential supply disruptions in the Middle East, with the conflict spreading to Lebanon, being at near the forefront of investors’ minds. Yet it looks like some investors have written off the prospects of a regional disruptions to supplies. Today’s just-released crude stockpiles data helped to push WTI oil a little off its earlier lows, but it struggled. Anyway, we maintain a slightly bearish crude oil outlook, especially if WTI breaks back below the $70 on a daily closing basis. Should that happen, it could potentially pave the way for a deeper drop amid follow-up technical selling and given existing concerns about rising supply and lack of a sharper demand growth.

US crude stocks fall more than expected

The just-released stockpiles data from the US were seeming bullish for oil, showing crude inventories falling to their lowest since March 2022. When the US Energy Information Administration’s weekly stockpiles hit the wires, crude prices refused to move higher despite the bigger than expected drawdown to the tune of 4.47 million barrels. This was partly due to the American Petroleum Institute (API) releasing similar numbers last night, meaning there was hardly any surprise with the official numbers.

Here are the key highlights from the inventories report:

• Crude -4.471MM, Exp. -1.43MM
• Distillates -2.227MM
• Gasoline -1.538MM
• Cushing +116K

The EIA stocks data followed the API figures that were released last night, revealing a 4.3-million-barrel draw—far exceeding the expected 1.1-million-barrel forecast. So, the bar war already set high for the official EIA figures. The fact that they only showed a slightly larger draw, and the fact that Cushing stocks rose, this failed to excite the bulls.

Crude oil outlook: Growth concerns linger

This week’s US data have been far from great, with Tuesday’s sharp drop in US consumer confidence this September casting a shadow over the demand outlook in the world's largest oil-consuming nation. This comes at a time when even Chinese authorities are realising that the world’s second largest economy is sputtering. That’s why they rolled out a series of stimulus efforts yesterday, aimed at boosting an economy that risks falling well short of its annual GDP targets. These moves, including reductions in mortgage rates and bank reserves, represent the most significant Chinese stimulus in years. However, it remains to be seen how effective the efforts will turn out to be and additional measures may be necessary to sustain growth.

WTI technical analysis

Source: TradingView.com

With WTI now testing – and so far, unable to break back above – key resistance area between $71.50 to $72.50ish (an area which had served as strong support in the past), we could see renewed selling pressure come into he market, should support at $70.00 now gives way.

If that happens, then a drop to re-test the December low at $67.87 could be on the cards. Prices could even drop to test the recent lows around $65.00.

Bullish traders meanwhile will be hoping to see WTI clear the abovementioned $71.50-$72.50 resistance zone to potentially ignite a fresh rally.

Fading impact of short covering

It is very difficult to say how much of an impact short covering has had on this recent oil-price recovery. But when a market is heavily positioned in one or the other direction, you tend to see a quick move in the opposite direction when supporting news or a fundamental driver comes out. We saw this with oil between 10-13th September, when prices jumped around 5 to 6 percent off their lows in the space of a couple of days. That was undoubtedly driven by short-covering, but the more recent gains may have had more to do with the escalation of Middle East tensions. But with demand concerns lingering, the crude oil outlook looks far from ideal for bullish investors.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R