Consumer savings decline, economy slows down, and EIA's forecast

Since December 2022, the price of West Texas Intermediate crude oil has been moving choppily between $70 and $83. Currently, one barrel trades near $77.50. We continue waiting on the sidelines for the market picture to clear. However, we are still unconvinced by bullish scenarios for oil, forecasting a return of $100 and above. That is because we already see a significant slowdown in economic activity around the globe and evaporating savings of consumers in the United States, both of which are likely to weigh on the oil demand in the coming months. Therefore, we would not be surprised to see USOIL break below $70 after some time. However, the U.S. administration might put a temporary floor for oil around that level due to its plans to refill Strategic Petroleum Reserves in the lower range of that price tag. As a result, this makes a compelling case for the continuation of choppy price action in oil; interestingly, that coincides with the latest assessment of the EIA.

The U.S. Energy Information Administration (EIA) forecasts that global petroleum production will increase by 1% (1.1 million b/d) in 2023. As for U.S. petroleum production, it sees an increase of 5% (1 million barrels per day). In addition to that, it expects OPEC's output to grow by 0.5% (160 000 barrels per day), and, due to Russia’s invasion of Ukraine and war-related sanctions, the EIA expects Russia’s production to drop by more than 12% (from 10.9 million barrels per day in 2022 to only 9.5 million barrels per day) in 2023. The U.S. Energy Information Administration (EIA) anticipates the West Texas Intermediate (WTI) crude oil price to stay relatively flat through the first half of 2023. After that, it expects the price to decline through the end of 2024. As a result, the agency foresees WTI crude oil to average $77 per barrel in 2023 and $72 per barrel in 2024.

Illustration 1.01
Illustration 1.01 displays the daily chart of USOIL. It also shows 20-day SMA and 50-day SMA. Yellow arrows indicate retracements toward these levels, which acted as corrections of the downtrend. We will pay close attention to the 50-day SMA and whether it will halt the price rise in the future; if it fails (and the price breaks above it), it will bolster the bullish case for oil in the short term.

Technical analysis
Daily time frame = Neutral/Slightly bullish
Weekly time frame = Neutral

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DISCLAIMER: This analysis is not intended to encourage any buying or selling of any particular securities. Furthermore, it should not be a basis for taking any trade action by an individual investor. Therefore, your own due diligence is highly advised before entering a trade.