USOIL Struggles to Extend its Rebound Despite Soft US Inflation & Robust Chinese Data

USOIL Analysis

Oil prices slumped last month and USOil reversed from the late-September 2023 highs, coming from a three-week losing streak. The Hamas-Israel war is relatively contained and does not seem to have disrupted supply flows. Markets appear cool about a potential spillover and more worried around demand prospects.

On the other hand, OPEC spoke of "strong" fundamentals and "exaggerated negative sentiments" on Monday, while upgrading its 2023 demand outlook, now expecting growth by 2.5 million barrels/day ^[1]. The International Energy Agency (IEA) also raised its forecast, seeing an expansion of 2.4 million barrels/day and took note of new record in demand from China. However, the agency warned that the market "could shift into surplus at the start of 2024".^[2]

Today's data from the world's largest importer of oil were encouraging, showing that Beijing's efforts to support the failing post-pandemic recovery are bearing some fruit. China's Industrial Production strengthened 4.6% y/y in October, which was the best print in a year. Retail sales increased 7.6% y/y and the highest since May. These year-over year comparison though are favorable due to the low base effects of the pandemic-bound 2022. Furthermore, consumer inflation shrunk 0.2%, producer prices stayed in deflationary territory and the property sector is distressed.

The US inflation report meanwhile reveled further progress, with headline CPI easing to 3.2% y/y and core increasing by 4% and the slowest pace in two years. The figures enhance market optimism for peak interest rates, but the Fed is unlikely to take a victory lap, as inflation is still high. With strong economy and tight labor market, policymakers may need to do more to restore price stability.

USOil has staged a turnaround over the past few days and the above data can provide support. The commodity has a chance to push for the EMA200 (at around 82.50) and daily closes above it could pause bearish bias. On the other hand, the upside looks unfriendly and USOil struggles to extend its turnaround despite the helpful economic releases. It remains in precarious position, vulnerable to 72.23, although further losses towards 66.78 have a higher degree of difficulty.