Crude oil outlook remains positive despite reduced war risk

• Crude oil outlook: Global PMI data to provide clues about demand
• Middle east tensions remain key driver of short-term action
• WTI technical analysis suggests longer-term trend still bullish

Crude oil holding steady ahead of a busy week

Despite falling in response to waning risks of a potential war involving major oil producer Iran with Israel, crude oil is still holding its own relatively well. It is holding a year-to-date gain of around 12%, which is not insignificant. There’s still a bit of premium from conflict in the Middle East factored in oil prices, but it is largely those OPEC+ supply cuts that’s responsible for the bulk of oil’s gains. Meanwhile, the demand outlook will come into a sharp focus this week with the release of the global manufacturing PMI data on Tuesday, as well as US GDP on Thursday, and the Fed’s preferred measure of inflation, core PCE, on Friday, with the latter likely to give us more clues on the path for monetary policy. From a more micro perspective, Corporate America is kicking off the busiest week of earnings season, which may provide us with an alternative view of the health of the US and world economies.

Crude oil outlook: Middle east tensions remain key driver of short-term action

I don’t think the oil market has priced in enough risk of the Middle East situation escalating to the point that oil supply is actually disrupted. Brent would need to be above $100 to $110 in my view to reflect those concerns. The fact that it is not, it shows that the market does not expect a major escalation in the fight between Iran and Israel, and other oil-producing nations in the region. Therefore, it is hardly surprising that crude oil has fallen only modestly in recent days, in light of no further escalation in the Middle East situation.  

Judging by the market’s reaction over the past couple of trading days, investors probably think that due to the small scale of the attacks on Iran by Israel, it is likely that both parties may now feel there is a restoration of deterrence. So, hopefully, an open conflict can be averted. Iran’s government has said that Israel has received the “necessary response at this stage.”

That being said, nothing can be taken for granted. The crude oil market may remain on the edge, and headline-driven. Any further escalation in the conflict can easily send oil prices sharply higher by a few dollars at the very least.

Global PMI data to provide clues about demand outlook

Last week’s weaker industrial data from China and the prospect of higher interest rates for longer from the likes of the US and UK raised concerns that the global economy could be heading for a downturn. These concerns could intensify should we see continued weakness in global PMI data on Tuesday. The manufacturing PMIs across Europe have remained weak for months, albeit the pace of the contraction has slowed. Unless we see further improvement, then this could further hurt market sentiment, which has taken a hit already by factors such as elevated geopolitical risks and a hawkish Fed. Crude oil investors will be looking for signs of revival of the manufacturing sector, as it will directly impact expectations about oil demand.

Crude oil outlook: WTI technical analysis suggests longer-term trend still bullish

While it is yet to print confirmed bullish reversal here, the longer-term path of least resistance on crude oil remains to the upside when you zoom out of the short-term price action a little, given the fact that prices have been making higher highs and higher lows ever since bottoming out in the middle of December.

With crude oil above the 200-day moving average, and the slope of the average being positive, this is an additional bullish technical indication. What's more, we have a bullish trend line in place since mid-December, which remains intact.

WTI technical analysis: key levels to watch

Source: TradingView.com

At the time of writing, WTI was coming off its worst levels after briefly dipping below Friday's low, when it had formed a long-legged doji candle. Today’s earlier sell-off was met with some buying activity around a key technical area in the $80.65 to $81.25 zone.

As you can see on the chart, crude oil had previously found strong resistance in the area around $79 to $80 zone before breaking higher in mid-March. It then found strong support on the retest of this area at the end of March, before staging a rally late in the month which carried on into April. However, since peaking at $87.29, crude oil has fallen back. On Friday, it tested the point of the origin of the last up move at around $80.65 to $81.25 zone and held. Once again, WTI tested this area earlier today, before bouncing off its worst levels.

On the upside, the area around $82.50 is a pivotal short-term area, followed by 83.00, and then thereafter the next area of resistance is at $84.50. A potential move above Friday's high at $85.62 would be a strong bullish technical signal. If breached, we could see the onset of a rally towards a new 2024 high above this month earlier high of $87.29.

This technical bullish outlook will remain valid for as long as the series of higher highs and higher lows remain intact. However, a daily close back below the 200-day moving average and the rising trend line would invalidate this bullish outlook.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R