Crude oil has embarked on a week-long ascent following a brief foray into the year's lows. This resurgence in oil prices was underpinned by a blend of geopolitical tensions, particularly the attacks on tankers in the Red Sea—a vital trade route that accounts for approximately 30% of global trade turnover. However, the dynamics influencing crude oil extend beyond geopolitics, with technical factors playing a pivotal role in the recent price action.
A closer examination reveals the following insights:
- Weekly Technical Indicators: Crude oil garnered significant interest from buyers after briefly slipping below the 200-week moving average. Remarkably, this marks the ninth instance in the year that oil has touched or breached this moving average only to conclude the week with gains. The frequency of these occurrences suggests the 200-week moving average has evolved into a key reference point for market participants.
- OPEC+ Influence: OPEC+ appears to be closely monitoring the 200-week moving average as well, as its interactions with this indicator align with verbal interventions and rounds of quota adjustments in 2023. A similar pattern emerged in 2019, with the 200-week average serving as a pivotal level, albeit temporarily disrupted by Russia and Saudi Arabia's policy divergence, amplified by COVID-related restrictions.
- Daily Oversold Conditions: On the daily timeframe, the downtrend that emerged in late November has resulted in oversold conditions. This has opened opportunities for a potential rebound. Notably, the recent price lows have not been replicated by the Relative Strength Index (RSI), hinting at potential bullish momentum. However, it's important to emphasize that the bull's resurgence in the oil market has yet to solidify. Crude oil continues to trade below its 50 and 200-day moving averages, underscoring the prevailing downtrend.
- Economic Headwinds: Amid the backdrop of oil gains, economic factors have exerted pressure in the form of decelerating global consumption. While record highs have been attained in US and German stock indices, and India's remarkable market performance in 2023, it's essential not to overlook sluggish or stagnant manufacturing and weak consumer demand in Europe and China.
- Technical Confirmation: From a technical perspective, the confirmation of an upside reversal hinges on oil prices surpassing the 50 and 200-day moving averages, currently residing in the $77.5 to $78.5 range—roughly 7% above the prevailing market levels. A 7% downturn from the present levels to $67.5 would represent a critical breach of recent years' key support and could signal a more substantial sell-off in the ensuing weeks.
In summary, the trajectory of crude oil remains uncertain, with a blend of geopolitical, technical, and economic factors influencing its movements. Market participants are advised to closely monitor price levels and technical indicators as they navigate this complex landscape.