Oil faces downside risk as supply glut grows despite geopolitical tensions and strong Chinese demand.
WTI could revisit $60 support; technical structure favors bearish setups until a clear reversal emerges.
Only a break above $63.64–$65.27 resistance would signal potential bullish momentum for crude prices.
Looking for actionable trade ideas to navigate the current market volatility? Subscribe here to unlock access to InvestingPro’s AI-selected stock winners.
prices have struggled in the last few weeks to show any clear bullish signs despite raised geopolitical tensions in Europe concerning Russia. It looks like investor concerns about supply remain the main issue for prices, as the risk of a fresh breakdown grows amid rising OPEC+ supplies and weak demand.
Supply Glut Means Risks Remain Titled to Downside for Prices
Many oil forecasting agencies, such as the International Energy Agency (IEA) have rung the alarm bell with their latest forecasts. The IEA itself thinks that a record surplus of 3.3 million barrels a day by 2026 is upon us. The US Energy Information Administration (EIA) echoes the concern, projecting an oversupply of 2.1mn b/d in the second half of this year and 1.7mn b/d in 2026. Many other oil forecasts are also expecting increased supplies.
The key question here is whether the supply glut will be met with increased demand growth. Obviously, times are a lot different from the pandemic era, when demand was collapsing as the glut was increasing due to the lockdowns. Still, the excessive supplies should keep pressure on prices until something gives.
But according to a report in the FT, much of the excess crude has ended up in Asia or floating storage, rather than visible hubs like Cushing or Rotterdam. China, in particular, has been stockpiling at a staggering pace, potentially to suggest Beijing may be fortifying its reserves against the risk of harsher sanctions to reduce vulnerability in a trade war.
So, demand at least from China has remained strong, which, alongside Western sanctions on Russia and Venezuela, has kept the downside limited for oil prices. But if the glut continues to increase, then prices could break lower more meaningfully. After all, the IEA sees global demand growth slowing sharply — only 700,000 b/d next year, the weakest outside the pandemic since 2009. If their projections turn out to be correct, then the balance will clearly tilt towards surplus.
So, keep a close eye on inventories. If they start showing up in visible storage, concerns about excessive supply will come to the forefront and lead to a sharp oil price drop.
Crude Oil Technical Analysis and Trade Ideas
From a technical point of view, the path of least resistance on oil continues to remain to the downside given the overall bearish price structure. Indeed, with price holding below both the 21 and 200-day moving averages, this is a non-subjective way of determining both the long and short-term trends. Against this backdrop, looking for bearish setups near resistance makes more sense than trying to catch the bottom near support.
Until something changes to trigger a technical reversal signal, extra caution should be taken with any long setups. In any case, traders may wish to proceed level to level when the trend is not strong.
So, it looks like the WTI future could be heading further lower in the short-term outlook. With prices trading inside what looks to be a triangle continuation pattern, a break below the $62.00 support level looks increasingly likely. If that happens, then we could see oil futures revisiting the psychologically important $60.00 level again and may even go on to dip towards the April lows of around $55.
But let’s see first if prices will break below $62.00, and if so, the immediate target will be $60.00. How WTI behaves near $60 (should it get there), then that could give us strong indications whether we will see another $5 or so drop.
In terms of resistance levels to watch, well, the initial one is at $63.00, but it is the area between $63.64 and $65.27 that is a more significant zone. Here, oil prices had bottomed in May 2023 and September 2024. The fact that prices have broken back below this zone is far from ideal from a bullish point of view. The recent breakdown below this critical juncture took place in early August, and since then, prices have struggled to climb back above it.
As things stand, therefore, only a break back above the $63.64 to $65.27 area would tip the balance back in the bulls’ favour. Unless that happens, I would continue looking for more downside in the short-term outlook.
***
InvestingPro provides a comprehensive suite of tools designed to help investors make informed decisions in any market environment. These include:
AI-managed stock market strategies re-evaluated monthly.
10 years of historical financial data for thousands of global stocks.
A database of investor, billionaire, and hedge fund positions.
And many other tools that help tens of thousands of investors outperform the market every day!
Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counsel or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple perspectives and is highly risky and therefore, any investment decision and the associated risk remains with the investor.