OIL : Challenging Resistance

(Mon, 19 Oct 2020). WTI crude oil prices attempted to challenge an immediate resistance zone in the US$ 41.00-41.50 area, after failing to break through it three times in the past five weeks. This might be attributed to a weaker demand outlook amid resurging virus cases and uncertainties surrounding the second US fiscal stimulus plan. A slower pace of recovery showed in the recent US jobs report also underscored a fragile recovery from the Covid-19 pandemic.

Monday’s release of Chinese 3Q GDP came in slightly below expectation, with the actual reading of 4.9% falling short of a 5.2% forecast. The figure, however, still marks a decent rebound from the first half of 2020 (chart below). Encouragingly, both retail sales (+3.3%) and industrial production (+6.9%) have registered their highest pace of expansion in 9 months and have beaten forecasts, showing a rapid recovery of Chinese domestic demand and exports. US equity futures edge higher amid favorable sentiment, which may also buoy crude oil prices.

The US Dollar index was little moved at 93.70, offering few clues to commodity trading in terms of the currency impact.

Crude oil prices have exhibited strong negative correlation with US inventory data over the past 12 months (chart below). In the medium term, falling crude stockpiles would likely underpin WTI prices, and vice versa. Total US inventories (excluding strategic petroleum reserves) have declined in recent months, falling from 536.7 million barrels in Mid-July to 489.1 million barrels in early October. WTI prices were mostly ranging between US$ 36.00 – 43.00 during this period however as falling stockpiles seemed to have been offset by a weaker demand outlook. The EIA’s next inventory data release is scheduled on October 21st.

Technically, WTI crude oil prices look set to re-attempt a key resistance in the US$ 41.00-41.50 area (highlighted on the chart below). Breaking above this level may offer room for more upside potential towards US$ 43.8 – the previous high. A retreat from current levels may lead to further consolidation at around US$ 40.00 (20-Day SMA). Bollinger Band width has narrowed significantly, suggesting that range-bound conditions may continue to dominate.

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