Crude Oil Eyeing Fresh Highs on Robust US Labour Data, China Reopening

Talking Points: 

• Crude oil prices may continue to press higher on China reopening optimism and a softer US Dollar.  

• Break of key downtrend suggests that bulls may be taking control of the commodity in the short-term.  

Crude oil prices have started a fresh week of trade on the front foot, climbing back above $75 a barrel as strong US economic data and hopes of a swift Chinese reopening assuage fears of a dramatic falloff in demand. The price of oil had been under a significant amount of pressure in the final quarter of 2022, sliding from a high of almost $94 a barrel at the start of November to $70 in less than a month, following heightened concerns that a global recession is on the horizon. However, the pivot by the Chinese Communist Party away from the strict Covid-zero policies that has hampered activity in the world’s second largest economy has buoyed crude prices.  

WTI Crude Oil Futures in Contango

Indeed, the recent spike higher comes despite a contango market structure in futures pricing – which signals that there is ample supply to match current demand. This structure could shift bullishly into backwardation should Chinese demand rebound robustly over the coming weeks, and if OPEC continues to strategically limit cartel members’ output. Moreover, Russian supplies of crude are expected to decrease markedly over the next 6 to 12 months due to sanctions imposed in response to the invasion of Ukraine. Having said that, there remains a strong fundamental argument against higher oil prices given the backdrop of tighter monetary policy settings and increased cost-of-living pressures in much of the developed world. Nevertheless, a break higher looks likely in the short-term.  

WTI Crude Oil Price Daily Chart – November Downtrend Break to Encourage Bulls 

From a technical perspective, the outlook for crude oil is starting to look more and more positive as prices break the downtrend extending from the November highs and accelerate back above the $75 mark.  

The formation of a Bullish Engulfing candle, following a Bullish Harami and Hammer candle carved out in the previous two trading sessions, suggests that a reversal higher is on the cards.  

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