Oil Under Pressure

It’s been another dismal week for oil traders. Crude futures have fallen over 8% from last week’s highs and are close to testing the YTD lows as selling continues into the end of the week. Broadly speaking, the market has been stuck in a range between 72.61 and 81.40 over the last few months as traders continue to struggle to build a strong directional view.

USD Strength

One of the key factors driving the current sales in oil is the renewed strength we’ve seen in USD recently on the back of the uptick in January inflation. A fresh spike in consumer prices is challenging the linear recovery lower in inflation and has thrown the current Fed-pivot into question, with many traders now expecting the Fed to step back up the pace of its tightening or continue tightening for longer. The subsequent strength we’ve seen in USD has had a heavy downward impact on oil and the broader risk complex.

Weak Demand An Issue

Another aspect of decline in oil prices is the concern we are seeing over the demand outlook. While improving US economic data suggests that oil demand is likely to pick up, recent inventories data has painted a picture of growing surpluses, reflecting lower demand. Consumers dealing with excessive inflation and higher rates are understandably seeking to lower costs where possible. However, as this situation continues and US oil production continues at record levels, the supply/demand imbalance is growing and putting further downward pressure on crude prices.

EIA Inventories Due Today

Looking ahead today, the market will receive the delayed weekly EIA inventories report for the latest insight into the US demand picture. On the back of the prior week’s 16.3 million barrel increase, the market is now looking for a further build of 2.9 million barrels which, if seen, should keep prices pressured into the end of the week. While this is typically a period of low demand for oil seasonally as refiners enter maintenance season, extreme weather conditions in parts of the US are exacerbating the issue this year with massive travel disruption and business closure being seen.

Technical Views

Crude

The decline in crude prices from the latest failure at 81.40 has seen the market breaking down below the 76.49 level, now trading down towards a test of support at the 72.62 area. With momentum studies weakening, risks of a downside break are growing and should current support give, 66.97 will be the next downside target to watch.