Crude Oil Could Gain Further Ground This Week as Ceasefire Hopes Diminish
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Crude oil starts the week on a subdued note after recent volatility tied to the Israel-Hamas conflict. Middle East tensions continue to influence oil prices significantly, overshadowing other factors. Improving US demand outlook and positive technical analysis signal potential long-term gains despite short-term fluctuations. The main driver of volatility remains the Israel-Hamas conflict. Hopes over a ceasefire had calmed the market last week. However, as it appears now that such an agreement may not materialize in the short term, oil prices may well continue to rise. Meanwhile, the charts of crude oil suggest prices may have formed a long-term low and that more gains could be on the way this week, despite Monday’s weaker start. Crude oil prices continue to display a heightened sensitivity to developments in the Middle East, overshadowing nearly all other factors. While there remains a slim possibility of a ceasefire, the situation is tense, which should keep oil prices highly volatile and vulnerable to headline risk. The extent to which a risk premium should be applied to the Middle East situation remains uncertain, as oil supplies have yet to be significantly impacted by the crisis. Improving US demand outlook and positive technical analysis signal potential long-term gains despite short-term fluctuations. On the demand side of the equation, we are seeing mixed global signals, with the US economy showing resilience while other regions struggle to keep pace. The spotlight is particularly on China as a significant cause for worry, though concerns in the Eurozone also contribute to the uncertainty. Due to Chinese markets being closed for Lunar New Year celebrations, assessing demand from the largest importer of oil and second-largest consumer will be challenging this week. In contrast, the US, as the world's largest oil consumer, will release key data to provide insights into demand dynamics this week. This week’s key data is the Consumer Price Index (CPI), crucial for FX and stock market investors. But its impact on oil prices is expected to be moderate. Following the CPI release, investor attention will shift towards gauging the health of the US consumer. Retail sales data, scheduled for Thursday, will be pivotal in this regard. Recent months have seen retail figures consistently surpassing expectations, with December marking a notable 0.6% increase in retail sales and a 0.4% rise in core sales. These robust retail figures align with a broader trend of growing consumer sentiment, low unemployment, robust wage growth, and gradual inflation moderation in the US. Such indicators of economic strength in the US are likely to provide support for oil prices, assuming no significant external disruptions or a significant rise in non-OPEC crude oil supplies. The technical analysis of crude oil suggests that prices may have formed a long-term low and that more gains could be on the way this week. A daily close above the 200-day average could potentially pave the way for further short-term gains. Short-term support is now seen at around $76.00, with $74.50 as the next key support level. The weekly chart of WTI shows that prices are trying to form a long-term bottom, with a series of higher lows having been created around $70 in recent months. The monthly chart is also starting to turn positive after oil prices ended a 3-month losing streak in January. Prices have now turned flat in February, recovering from earlier weakness. This suggests a potential end to the prolonged bearish trend initiated in April 2022. The long-term bearish trend has abated, and this could mark the beginning of a new long-term uptrend.
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