Oil Prices Are Getting Ready for a Jump

Oil prices have remained relatively neutral this week, with Brent crude returning to the starting point at $78.30 per barrel after initially dipping to $76.40 (a 2.3% decrease). Investors exhibited a buy-the-dip mentality on Wednesday and Thursday.

Weak demand is a key factor exerting pressure on oil prices. The latest Q4 2023 GDP figures from China were somewhat disappointing, with a 5.2% YoY growth missing the consensus of 5.3%. Despite industrial production beating expectations at 6.8% YoY, lower-than-expected retail sales at 7.4% YoY and an unexpected rise in unemployment to 5.1% contributed to concerns.

In the United States, retail sales rose by 0.6% MoM in December, surpassing the consensus of 0.4% MoM. This has raised concerns about anticipated interest rate cuts by the Federal Reserve (Fed), leading to a decrease in bets on rate cuts in March to 59.1%, the lowest reading this month.

OPEC maintained its forecast of a 1.8 million barrels per day deficit in 2024, initially causing oil prices to decline. However, missile strikes in the Middle East altered the outlook significantly. The U.S. military reported destroying 12 missile sites belonging to Houthi rebels, and Iran launched missiles on Iraq, Syria, and Pakistan. This escalation in the conflict may disrupt oil supplies, especially given that both Iran and Iraq are major oil producers. The continuous conflict could impact global oil markets by blocking trading routes in the Red Sea and Persian Gulf.

Brent prices have been hovering between $77.00 and $78.00 per barrel since mid-December, and this range appears to be narrowing, potentially leading to increased volatility by the end of the week. The United States Oil Fund LP (USO) reported net capital outflows of $20.0 million since the beginning of the year but saw inflows of $47.6 million last week after a larger outflow the week before. The strong support at $73.00-75.00 per barrel suggests a higher likelihood of oil prices rising rather than falling. The next upside target is around $83.00-85.00 per barrel for Brent crude.