Crude Oil Extends Losses, But Fundamentals Point to A Potential Reversal

Summary:
• Crude oil prices have declined in reaction to US interest rate announcement, but the demand side fundamentals remain strong.

Crude oil prices headed downwards for the second consecutive session on Thursday as traders reacted to the Fed interest rate decision. Brent crude added -0.50% to Wednesday’s -1.23% loss to trade at $85.61 per barrel at the time of writing. Similarly, WTI was at -0.37% on the day, adding to Wednesday’s -1.76% to trade at $80.96.

Notably, the downtrend comes despite the reduction in US crude stockpiles for the second week in a row. The EIA reported on Wednesday a decline of 1.952 million barrels for the week ending March 15^th, beating the forecast estimate of -0.900 million. Investors are concerned that higher-for-longer US interest rates will not only strengthen the US dollar, but could also constrain economic growth in the US, reducing demand for oil. Having said that, the Fed revised upwards its US GDP projections for 2024 from 1.4% to 2.1%.

Despite the market reaction in the aftermath of the Fed interest rate decision, oil seems headed for a good run in the first half of the year, with the latest positive outlook coming from Standard Chartered. Commodity analysts at bank say the daily demand for the commodity will reach a new high of 103.01 million barrels per day in May, signaling a price surge in the mid-term.

Crude oil prices are currently being propelled by a surge in hostilities in the Russia-Ukraine war. Analysts at J.P. Morgan have placed a $4/barrel premium on the commodity following the recent surge in Ukrainian attacks on Russian oil infrastructure. The immediate forecast will be on US initial jobs claims data, which will be released on Thursday and is expected to impact the dollar’s strength. In view of the latest decline in US oil inventories, a higher-than-expected figure will almost certainly result in gains by oil prices and vice versa.

Technical analysis

WTI crude downside will prevail as long as resistance remains at 81.14. With the sellers in control, they could break the 80.73 support and potentially set the stage to target 80.53 next. However, if the buyers fight back to keep the price above 81.14, they could build momentum to move to 81.46. A continuation of bullish control at that point will breach the resistance, nullify the bearish narrative and potentially test 81.73 in extension.