WTI sees end to bullish impulse wave on concerns over cooling economic activity

THE West Texas Intermediate (WTI) price pulled back sharply for the third consecutive week following an early surge in April 2023 to its highest levels since November 2022, after surprise output cuts by Opec+. A slew of weak manufacturing readings from the two largest economies in the world have also left investors fearing worsening economic conditions, leaving oil prices to wallow at the lowest levels since late March this year.

Data released last week showed an unexpected shrinkage in China’s manufacturing activity in April, casting doubts on the prospects of the country leading a recovery in oil demand, as the Manufacturing Purchasing Managers Index (PMI) came in at 49.2, lower than the 51.4 consensus. The Non-Manufacturing PMI came in at 56.4, also missing the 57.0 expected figure. The subdued investor sentiment was exacerbated by the US Institute for Supply Management’s PMI which signalled a sixth straight month of contraction, and the US Census Bureau’s 0.9 per cent month-on-month increase in factory orders which missed the 1.1 per cent consensus. Signs of a larger than expected drawdown in US crude inventories offered little to stem the bearish momentum. The American Petroleum Institute data showed a drawdown of 3.9 million barrels.

On the technical charts, the short-lived bullish impulse wave has carried the commodity to the strong cluster of resistance at the US$80-US$83 area. The price retested the strong horizontal resistance at US$83, which was also the level when prices pulled back in December last year and January this year. The pullback took place abruptly last month when the price popped above the consolidation wedge resistance briefly, following a week of range trading, and was unable to hold onto the short-term range resistance level at US$81 which it broke out of. The sell-off accelerated when bearish traders managed to push the price below the short-term range support level at US$79, and the bulls were unable to take the commodity above it as well as the 200-day Simple Moving Average (SMA), following a retest on April 24. It signalled that the longer-term downtrend resistance will remain stubborn. The technical death cross pattern where the 50-day SMA is below the 200-day SMA remains present for WTI.

Concerns over slowing demand from cooling economic activity have battered the commodity in recent weeks, outweighing tightening supply and a greater-than-expected drawdown in inventories, and causing oil to give up its gains since the production cuts. Coupled with the confluence of resistance at the US$80-US$83 area, WTI is likely to revert to its range trading type environment and test the recent lows near US$65 in March 2023, while waiting for stronger support from bullish traders to prop up prices.

The writer is research analyst at Phillip Securities