The oil demand outlook has improved whilst supply is constrained. However, the price remains restricted and much is still needed to signal sustainable recovery.

After falling throughout much of 2022, the oil price has found a floor of support in weeks. Having formed a consolidation range, the potential for recovery is growing. 

The dynamics of oil supply and demand suggest that higher oil prices could be seen, but does the technical analysis show the oil price is ready to rally?

Watch for: 

  • Positive economic data from China fuelling expectations of increased oil demand
  • Restrictions in the oil supply of OPEC and Russia continuing
  • A breakout on Brent Crude oil above resistance at $90 is needed to turn the consolidation range into a base pattern.

The fundamentals of the oil market are looking more favourable

The outlook for both oil demand and oil supply is looking more favourable in early 2023.

Expectations for oil demand are being revised higher. The key seems to be the re-opening of the Chinese economy. Furthermore, there are signs that the slowdown in the US economy may be softer than previously thought. This is supportive for oil.

This comes also as the outlook for oil supply remains restricted, with Russia and other OPEC+ countries vowing to prevent any increases in oil production. Again this should help to support oil in the coming months.

OPEC has raised its outlook for global oil demand

In the first revision to its demand forecasts for several months, last week OPEC raised its forecast for oil demand growth in 2023.

It increased the projection by 100,000 barrels per day (bpd) to 2.32m bpd.

In its monthly report, OPEC said: 

“Key to oil demand growth in 2023 will be the return of China from its mandated mobility restrictions and the effects this will have on the country, the region and the world.”

China’s re-opening of the economy is expected to boost oil demand

The impact of China’s economy re-opening could be significant for oil over the coming months.

For almost three years, China’s zero-COVID policy resulted in numerous lockdowns of major cities and regions, social restrictions and disruption to global supply chains. 

However, this changed in December 2022. After civil unrest triggered by Chinese people watching a World Cup free of COVID-19 restrictions, China finally relaxed its zero-COVID policy. International travel was soon permitted to return to normal. The economy was allowed to fully re-open.

China is seen as a considerable growth engine for the world economy. This chart from Goldman Sachs shows how much of a boost China could give to the global economy in the coming quarters.

This chart from Goldman Sachs shows how much of a boost China could give to the global economy in the coming quarters.Strong Chinese growth helps to encourage risk appetite across major markets and is a positive for commodities. It is expected that it will help to boost oil demand once more.

Goldman Sachs estimates that oil demand could increase by around 1 million barrels per day (around 1% of total global demand). According to their oil strategists, it could boost the Brent Crude oil price by around $15 per barrel.

A potentially softer landing for the US economy also helps oil demand

The potential for a softer landing for the US economic slowdown is growing. This could also help to bolster oil demand.

There have been notable encouraging signs for the US economy in the January data:

  • Nonfarm Payrolls showed particularly strong resilience in the labour market
  • US Retail Sales were far more positive than forecast. 
  • Both US CPI and US PPI inflation readings were more sticky than expected

This all points to a US economy that is coping well in the face of interest rates at 4.75%. 

Now, the situation might change in the weeks and months to come. However, the Atlanta Fed GDPNow forecast sees Q1 GDP currently at a run-rate of c. +2.5%. This is considerably higher than the consensus that is around flat. 

Atlanta Fed

If this is even close to the actual (we will find out in April), there is a growing likelihood that the US economy may be in for a softer landing than previously thought possible.

A stronger-than-expected US economy will add support to oil demand. Furthermore, it would also improve risk appetite, which is a key positive driver for cyclical commodities such as oil.

Production cuts and lower supply growth

The higher oil demand also comes at a time when the outlook for oil supply is also being reduced. 

Russia announced last week that it would cut oil production by 500,000 bpd in March (c. 0.5% of total global production). Additionally, OPEC+ continues to aim for a reduction in its production targets of 2 million bpd (as agreed in November). 

Although OPEC struggles to achieve these production cuts, the continued aim suggests that the oil supply is unlikely to be growing too much. The outlooks for supply and demand for oil are moving in opposite directions in early 2023.

A ranging technical analysis outlook for oil

Although the oil fundamentals are looking more encouraging, for now, the technicals reflect consolidation. The oil price is trading sideways on a medium-term basis. 

The 2023 correction looks to be bottoming

Having seen the Brent Crude oil price find a low at $75.50 in December, a series of higher lows have formed. There are key supports now at $77.40 and $79.00.

  • The 21 and 55-day moving averages have flattened. This reflects a growing near to medium-term neutral outlook.
  • The daily RSI has been oscillating between 38/62 which reflects classic trading range conditions.
  • However, an 8-month downtrend has been tested but it has not yet been broken. This is restricting recovery.
Having seen the Brent Crude oil price find a low at $75.50 in December, a series of higher lows have formed.

The bulls are not yet in control of Brent Crude

Despite the signs that the sustained selling pressure has eased, the buyers are not yet in control of the oil market.

Near-term rallies are still struggling for traction. The recent rebound has faltered again and turned back lower this week.

The consolidation range continues:

  • Key support is between $75.50/$78.50
  • Key resistance remains a barrier at $89/$90

What is needed for sustainable recovery?

Brent Crude is in a medium-term trading range. For this to change, decisive bull candles need to drive the price higher. Also:

  • A close above $90 is needed, ideally with the RSI rising into the mid-60s to confirm the breakout.
  • Support of higher lows above a rising 55-day moving average would suggest a decisive improving outlook.
  • The support at $79.00 ideally needs to hold.

Although we will be watching for any improvements in the coming weeks, for now, we favour continuing to play the medium-term range.

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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