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Oil market: Supply constraints and the new variant in focus

14 December 2021

The Oil market made a notable comeback in the most recent daily sessions, basically putting a halt to the downward momentum that has formed since November. WTI’s price moved higher for the past three consecutive daily sessions while today it seems to have stabilized. This report will outline the most important and recent updates from the Oil market along with our observations of WTI from a technical analysis perspective. Our aim is to provide a brief yet informative oil market review and to assist traders to the maximum.

WTI H4 Chart

WTI H4 Chart

At the moment most of the market’s focus is upon the Omicron variant. Initially the news on the variant found Oil traders supporting a selling strategy. The new variant’s characteristics where unknown to authorities thus its surge was expected to enforce new lockdowns measures essentially limiting fuel consumption. Yet the sentiment changed rather fast as specialists are now downgrading the severity of the variant with some analysts suggesting the situation remains unchanged. Ofcourse, the more optimistic outlook seems to support Oil prices with the most recent news lifting WTI’s worth per barrel higher. This is an indication that headlines on the new variant and generally the virus seem to be under the market’s radar while traders react depending on the importance of the update. Finally, we would like to emphasize that the Omicron variant’s impact could require months before being accurately determined and in the meantime some ambiguity over the matter may persist. This may create short term outbursts for Oil’s price action thus caution is advised.

In the past days, the weekly Oil market data failed to produce significant price movement for the commodity’s price. On the 8th of December the EIA weekly stockpiles indicated a minor drawdown of -0.24M barrels yet WTI’s price dropped upon release and rebounded higher thereafter. A day before, the API weekly reading indicated a notable drawdown of -3.1M barrels which the market ignored and the Baker Hughes Oil rig count remained unchanged in the past week with 467 active US Oil rigs.

On a different perspective some important figures in the US oil industry seem to be concerned over Oil prices potentially bolstering much higher than current levels. The worries seem to form on a number of reasons. Even if Oil prices have increased substantially in 2021, US shale oil producers are still keeping their output constrained as investors push for a higher share of the returns. Despite the fact the US Oil companies have been making notable profits, increasing production has not been their priority a fact that was also implied by Jennifer Granholm the US secretary of energy. Oil executives are also putting more pressure on US president Joe Biden in order to find a solution, as the commodity’s price impacts household spending and the economy as a whole. Inflation concerns are also connected to the higher energy prices observed in 2021.

This matter has subsequently given more power to the OPEC plus group which is currently being extremely cautious not to oversupply the market as the uncertainty of the pandemic looms. However, as per a statement included in the EIA December Short-Term Energy Outlook, Oil prices where on the decline before the Omicron Variant was announced during late November. This was likely due to gradual increases in production by OPEC+ members and the United States and rising COVID-19 counts in Europe. These circumstances may persist in the short term putting negative pressure on Oil prices.

At the moment, WTI is returning downwards from a brief attempt of the (R1) 73.50 that failed to be clearly tested. In our view this is an indication that rightfully the level stands as our first resistance.

Referring to a possible upward movement we highlight the (R2) 76.30 resistance as the next possible stop for the bulls while even higher the (R3) 79.10 level remains a considerable test for a buying strategy. In the opposite direction if a selling trend is formed then we could see the (S1) 70.30 support coming into play first. If the selling is to continue then the (S2) 66.35 support can possibly be reached. The (S2) 66.35 is a crucial level in our opinion as price action has encircled it using it as both a support and a resistance in the near past. Our final support stands at the (S3) 62.60 which is the lowest level tested since August. Please take note of the RSI indicator below our chart that was unable to breach above 70 in the recent upward movement, possibly implying that the majority of the market sentiment maybe in favor of a bearish outlook for the time being.


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