WTI bulls move in across corrective structure

West Texas Intermediate crude oil was up 3.4% at $78.86bbl in afternoon trade during the New York session. The energy sector has been relieved a little by a slightly softer US dollar on Tuesday that eased off a 20-year high.

Additionally, oil producers suspended some production from Gulf of Mexico platforms threatened by the approach of Hurricane Ian. Nevertheless, DXY, an index that measures the greenback vs. a basket of currencies, has been attempting to recover in the US session on the back of firmly hawkish Federal Reserve speakers. The index has traded between a low of 113.332 and 114.472 on the day so far and is back to trading towards the highs of the days currently.

Federal Reserve policymakers St. Louis Fed President James Bullard and Chicago Fed President Charles Evan advocated more interest rate hikes even at the risk of slowing economic growth while Minneapolis Federal Reserve Bank President Neel Kashkari on Tuesday said in a WSJ Live interview that central bankers are united in their determination to do what needs to be done to bring inflation down, and financial markets understand that. "There's a lot of tightening in the pipeline," Kashkari said.

Overall, tighter monetary policy leads to weaker demand for crude oil and fuel products and has been partly to blame for the drop in Brent and WTI which both recently reached their lowest levels since January. The volatility in the price of oil has been leading to speculation that OPEC+ may be pushed to cut production when it meets next week to set monthly quotas.

''Risks from structural supply issues are still present, and the previously expected Iranian supply, which eroded supply risk premia, is now looking less likely. For now, in this current macro risk-off environment, these supply concerns appear to be largely ignored while demand expectations are at the low,'' analysts at TD Securities argued. ''A repricing of these market expectations will be required to lift crude prices out of their current funk. In this sense, attention is shifting toward potential OPEC cuts, given the cartel has shown to be nimble in their support of the global oil market.''

"The price slide ratchets up the pressure on OPEC+ - there are already calls on the market for greater production cuts of up to 1 million barrels per day," Commerzbank said in a note with respect to OPEC.

Elsewhere, the first hurricane of the season, Ian, in producing areas of the Gulf of Mexico is affecting supply. Reuters at the start of the week had reported that BP and Chevron were closing some platforms Ian approached Florida's west coast. ''The storm is the first this year to disrupt oil and gas production in the U.S. Gulf of Mexico, which accounts for about 15% of the nation's crude oil and 5% of dry natural gas production.''

Meanwhile, the European Union is reportedly struggling to reach an agreement on a price cap on Russian oil, with countries such as Cyprus and Hungary expressing opposition. ''A deal now looks unlikely despite earlier expectations that one will materialize this week'', ANZ Bank reported.

In general, the analysts at TD Securities explained that ''persistent demand worries have dampened sentiment in a low liquidity environment, and global macro risk-off has further driven the deterioration in recent sentiment. Fundamentally, the weakness may have been exaggerated in the immediate term, as physical demand indicators have not been declining at such a rapid pace''

"At the same time,'' the analysts continued, ''the high-frequency US demand data from the EIA, which has been extremely weak, has come under increasing scrutiny amid large adjustment factors and inconsistency with mobility and flight data. Furthermore, heading into the winter, demand may marginally improve relative to the weakness being priced in as Chinese run rates could rise to meet fuel export quotas, while re-opening and improved mobility, along with potential winter gas-oil substitution, could offer support.''

WTI H4 H&S in the making

As illustrated, the price is basing on $76.23 lows and could be in the process of firming the right-hand shoulder of an inverse head and shoulders, a bullish pattern that could lead to a significant breakout below $80.29 recent highs over the coming days.