Crude Oil Could Gain Further Ground This Week as Ceasefire Hopes Diminish

Crude oil has started Monday on a slow note following a highly volatile last couple of weeks when losses of more than 7% were recouped from one week to the next.

The main driver of volatility remains the Israel-Hamas conflict. Hopes over a ceasefire had calmed the market last week. However, as it appears now that such an agreement may not materialize in the short term, oil prices may well continue to rise.

Meanwhile, the charts of crude oil suggest prices may have formed a long-term low and that more gains could be on the way this week, despite Monday’s weaker start.

Middle East Situation Remains Key Focus for Oil Traders

So, crude oil prices continue to display a heightened sensitivity to developments in the Middle East, overshadowing nearly all other factors.

While there remains a slim possibility of a ceasefire, the situation is tense, which should keep oil prices highly volatile and vulnerable to headline risk.

That said, the extent to which a risk premium should be applied to the Middle East situation remains uncertain, as oil supplies have yet to be significantly impacted by the crisis.

Minor disruptions such as rerouting ships around the African continent, could arguably increase costs.

Consequently, even in the event of a ceasefire, I estimate the downside risk for oil to be limited to approximately 5-7%.

Improving US Demand Outlook Additional Support for Oil

Meanwhile, on the demand side of the equation, we are seeing mixed global signals, with the US economy showing resilience while other regions struggle to keep pace.

The spotlight is particularly on China as a significant cause for worry, though concerns in the Eurozone also contribute to the uncertainty.

However, due to Chinese markets being closed for Lunar New Year celebrations, assessing demand from the largest importer of oil and second-largest consumer will be challenging this week.

In contrast, the US, as the world's largest oil consumer, will release key data to provide insights into demand dynamics this week.

This week’s key data is the Consumer Price Index (CPI), crucial for FX and stock market investors. But its impact on oil prices is expected to be moderate.

This is attributed to oil's relatively lower sensitivity to dollar fluctuations compared to assets like gold. However, any notable reaction in the dollar will be closely observed by oil traders.

Following the CPI release, investor attention will shift towards gauging the health of the US consumer. Retail sales data, scheduled for Thursday, will be pivotal in this regard.

Recent months have seen retail figures consistently surpassing expectations, with December marking a notable 0.6% increase in retail sales and a 0.4% rise in core sales.

These robust retail figures align with a broader trend of growing consumer sentiment, low unemployment rates, robust wage growth, and gradual inflation moderation in the US.

Such indicators of economic strength in the US are likely to provide support for oil prices, assuming no significant external disruptions or a significant rise in non-OPEC crude oil supplies.

WTI Technical Analysis and Trade Ideas

After bouncing back last Monday oil did not look back until making a slightly weaker start in today’s session. WTI’s 6.3% gains nearly erased all of the previous week’s losses but came short by a couple of dollars.

Standing on the way of a bigger recovery was the 200-day average, which is flat-lining around the $77.50 area.

With both the bulls and bears having genuine reasons to move prices in their favor, there is little surprise that we have seen crude oil consolidate around this average for the past several months.

But a daily close above it this week could potentially pave the way for at least further short-term gains.

A run on liquidity above the previous month’s range at $79.29 looks probable, which could then trigger further follow-up technical buying towards the $80.00 levels.

Meanwhile, short-term support is now seen at around $76.00, which was being tested at the time of writing. Below this level, $74.50 is the next key support I would be eyeing for a potential bounce.

Looking at the weekly chart of WTI, you can see that prices are trying to form what looks like a long-term bottom, with a series of higher lows having been created around $70 in recent months.

Last week saw WTI form a bullish-piercing-candle-like reversal pattern.

The big selling from the previous week failed to draw in the sellers and instead, oil went on to close near the upper end of the previous week’s range.

The reversal means bullish hopes are alive that we may see a move above the resistance zone shaded on the weekly chart, pointing to a potential breakout above the key $80 level at some point this week.

What’s more, the monthly chart is also starting to turn positive after oil prices ended a 3-month losing streak in January.

Prices have now turned flat in February, recovering from earlier weakness. All this suggests a potential end to the prolonged bearish trend initiated in April 2022, triggered by the Russian invasion of Ukraine.

Since hitting a low of just under $68 in May of the previous year, the market has formed several higher lows, with a few taking place during last summer and in December at $67.71.

Since the December low, there have been instances of interim higher highs and higher lows, though prices have yet to surpass September's peak of $95.

Consequently, it appears that, at the very least, the long-term bearish trend has abated. At best, this could mark the beginning of a new long-term uptrend.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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