WTI Oil: Rising Geopolitical Risk Premiums and China Stimulus May Have Created a Medium-Term Floor at US$67.55-65.70/Barrel
The recent sell-off of 18% in WTI crude oil since August has come to a halt. Increases in hostilities in the Middle East combined with anticipated fiscal stimulus measures from China are likely to initiate a medium-term trend change in oil prices. Technical factors point to a potential further rebound in WTI crude oil towards the next resistance zone at US$78.30/80.30.
In the past two months, the price actions of West Texas Oil CFD (a proxy for WTI crude oil futures) have declined more than expected, breaking below the US$73.15/barrel level, which was a significant support level since March 2023, and reaching a low of $65.65 on 10 September 2024.
The recent decline in oil prices can be attributed to the OPEC+ strategy change announced in June. This strategy moved away from targeting US$100/barrel, aiming instead to restore prior supply cuts by increasing production. The hike in output is expected to boost supply by over 2 million barrels per day, counteracting the declining market share lost to US shale gas producers.
Moreover, China’s recent lackluster economic data, including inflation, retail sales, and industrial production, have increased concerns regarding a possible deflationary spiral, potentially reducing oil demand from China, a major energy consumer.
Influence of Geopolitical Risks and China’s Impending Stimulus
China is striving to reverse the potential deflationary spiral with top policymakers shifting from incremental measures over the past years to significant monetary accommodations. A series of rate cuts on key interest rates and changes to banking policies were recently announced. Further measures are anticipated to target consumer spending and confidence directly, given September’s Politburo meeting statement indicating potential expansionary fiscal policies targeting the real estate market.
These actions are aimed at rejuvenating China’s economy, likely increasing oil demand as internal consumption in China improves.
Another factor introducing a potential floor to the current oil price decline stems from the supply side. Increased hostilities in the Middle East have raised concerns. An Iranian missile strike on Israel has escalated tensions, prompting fears of possible retaliatory actions targeting Iran’s oil and gas assets, which might lead to major supply disruptions.
Technical Indicators for WTI Crude Oil
The daily MACD trend indicator for West Texas Oil CFD has displayed a higher low as of 30 September and experienced a bullish breakout from a prior descending resistance trend line initiated on 5 July.
These observations suggest that the bearish momentum from earlier declines has eased, enhancing the likelihood of a trend change within the medium term. Key support levels to watch are US$67.55/65.70. A move above US$73.15, aligned with the 50-day moving average, could signal a potential rebound toward the next resistance at US$78.30/80.30. Should prices falter to maintain the support at US$67.55/65.70, it might invalidate this bullish outlook, potentially setting the stage for further declines toward US$60.20/58.80.
As the oil market navigates through these complex geopolitical and economic landscapes, stakeholders are advised to remain vigilant and attuned to the potential impacts these developments may have on oil prices in the medium term.
