Oil Prices Forecast: Inflation Data, Middle East Unrest Impacting Crude

Highlights

• Oil prices rise due to investor caution and global events.
• Fed’s potential rate hikes hinge on inflation data.
• Geopolitical tensions and OPEC+ cuts affect market outlook.

Market Sentiment Amidst Global Uncertainties

Oil prices witnessed a slight increase on Tuesday, driven by investor caution ahead of pivotal interest rate decisions and U.S. inflation data. However, concerns about a potential supply surplus and decreased demand growth kept the gains in check. This cautious sentiment stems from the anticipation of the U.S. Consumer Price Index (CPI) report and the Federal Open Markets Committee’s (FOMC) meeting outcomes.

At 05:48 GMT, February Brent crude oil prices are trading $76.49, up $0.46 or +0.61% and January West Texas Intermediate (WTI) crude oil futures are at $71.81, up $0.49 or +0.69%.

Federal Reserve’s Stance and Inflation Concerns

The Federal Reserve is expected to keep interest rates stable, but the possibility of further tightening remains if inflation continues to be a concern. The November minutes of the Fed indicated this potential, suggesting that rate hikes might persist if inflation does not ease. Conversely, if inflation shows signs of subsiding, the Fed might consider rate cuts in 2024, depending on economic conditions.

Geopolitical Tensions and Oil Supply Dynamics

Recent geopolitical events, such as the missile strike by Yemen’s Houthi rebels on a Red Sea chemical tanker, have added to the complexity of the oil market by escalating regional tensions. This incident has raised safety concerns for shipping in one of the world’s key oil transit routes. Moreover, there’s growing skepticism about the efficacy of OPEC+’s planned output cut of 2.2 million bpd in early 2024, given the expected excess supply from non-OPEC countries.

Market Structure and Demand Outlook

The current market structure of WTI and Brent crude indicates a contango for the initial months of 2024, reflecting an anticipation of ample supply or lower demand. This sentiment is further evidenced by the weakening physical markets in the North Sea and West Africa, suggesting a softer demand scenario.

Short-term Bearish Outlook

In the short term, the oil market outlook appears bearish, dominated by concerns over surplus supply and the effectiveness of the OPEC+ output cuts. Market observers are closely monitoring the physical supply responses and adherence to the production cuts within OPEC+, which will play a crucial role in shaping global oil supply and price trends in 2024.  The trend is still down with most traders treating the current three-day counter-trend move as a relief rally and a fresh shorting opportunity.

Technical Analysis

Light Crude Oil Futures are currently trading below their 50-day and 200-day moving averages, indicating a potential bearish trend.

The current daily price of 71.81, just above the minor support level of 66.85, suggests a delicate balance in market sentiment. However, with the price also below the minor resistance of 72.48 and well under the main resistance of 77.43, there’s room for upward movement if bullish factors come into play.

The close alignment of the current price with the minor resistance level indicates that this level could act as a pivotal point for future price movements, potentially leading to a test of the main resistance if surpassed.