By Rania Gule Market Analyst at XS.com

During Wednesday’s trading, crude oil (WTI) rose to around $75.50 per barrel. I believe this increase is partially attributed to optimism regarding potential cuts in U.S. interest rates, which could stimulate economic growth and increase demand for fuel and energy products.

Despite ongoing attacks and escalating tensions in the Middle East, there is a possibility that crude oil prices may face new challenges. Major shipping companies, including Maersk, CMA, and CGM, have begun returning to the Red Sea after deploying a multinational protection force in the region. Hapag-Lloyd is expected to announce its decision on resuming shipments today. In my view, the return of these giant shipping companies to the Red Sea indicates cautious stability despite ongoing security concerns in the region.

The United States has also finalized contracts to purchase three million barrels of crude oil to replenish the strategic oil reserve. This move comes after the largest-ever sale from the strategic reserve last year. The U.S. Department of Energy announced this decision yesterday, indicating a strategic effort to boost U.S. reserves and address energy security concerns.

I also believe that the markets are closely watching the release of the American Petroleum Institute’s (API) weekly crude oil inventory data. Attention will then shift to the Energy Information Administration’s (EIA) report on changes in crude oil inventories, providing insightful projections for inventory levels. Additionally, the release of the Baker Hughes U.S. oil rig count on the upcoming Friday, which provides information on active oil rigs, may indicate future oil exploration and production trends.

In conclusion, redirecting a significant number of fleets to the Red Sea amid current geopolitical concerns could cause a short-term spike in crude oil prices in the coming weeks. Angola’s announcement last Thursday that it would withdraw from the Organization of the Petroleum Exporting Countries (OPEC) due to disagreements over oil production cuts is noteworthy.

It is worth noting that the U.S. dollar is currently declining at 101.38 points, with markets leaning towards pricing in interest rate cuts in early 2024. This move contradicts several warnings from Federal Reserve members who described the markets as overly eager and enthusiastic about interest rate cuts in 2024. This is not in the best interest of crude oil prices in the short and medium term.

It appears to me that the high differential in interest rates between U.S. yields and those of other countries, a key driver of the strength of the U.S. dollar in 2023, is beginning to fade. This could likely lead to chaos and disruption between the Federal Reserve and global markets in early 2024, potentially resulting in economic repercussions and violent price fluctuations.

Technical Analysis of the Oil (WTI) Prices:

On the four-hour chart, we can observe that crude oil prices recently surged to their highest levels, reaching $76.36. OPEC+ is currently facing increasing challenges regarding production cut decisions. With Angola’s exit from the organization, several other African countries may join, potentially causing prices to move within a technical sideways range between $76.36 and $73.60 in the short and medium term.

Such a decision could not have come at a worse time, as Brazil is scheduled to join the organization as an observer, not participating in production decisions. Consequently, as OPEC loses control over oil prices, market movements become more violent and volatile. Breaking through either direction in the future will be crucial in determining the true path of the markets.

Oil (WTI) Prices Chart –- XS.com.

In a bullish scenario, if the $74 level is broken and tested as support, this could further support crude oil prices, potentially targeting the next resistance level around $80. Although the price is still a distance away from these levels, $84 becomes the next target once oil closes daily above $80.

In a bearish scenario, crude oil could drop below $74, with the possibility of prices breaking support and stabilizing below, making the next bearish target around $67.00. This level coincides with a triple bottom since June. If this triple bottom is breached, the annual closing low at the new low of $64.35 in 2023, the lowest level since May and March, would be the last defense line for a potential upward rebound. However, if breached at the beginning of the new year, the next bearish target would be $57.45, representing the next support level in case of a sharp decline.

Support Levels: $74.40 – $73.60 – $72.15

Resistance Levels: $76.13 – $76.98 – $78.40