WTI finds short-term support near $67.50, downside looks likely amid hawkish Fed bets

West Texas Intermediate (WTI), futures on NYMEX, have gauged intermediate support around $67.50 in the Asian session. The pullback move in the oil price to near $69.50 was capitalized by the market participants as a selling opportunity amid multiple bearish catalysts.

As United States consumer spending turned out to be resilient in April and their labor market conditions are still healthy, it seems that the Federal Reserve (Fed) is preparing for a fresh rate hike despite announcing that more rate hikes are less certain amid tight credit conditions by the US regional banks. Further monetary policy tightening by the Fed would deepen hopes of a recession in the US economy, which will have a significant impact on the oil demand.

On Wednesday, a sharp decline in China’s factory activity displayed a bleak outlook for oil demand. China’s National Bureau of Statistics (NBS) reported Manufacturing PMI at 48.8, lower than the estimates of 49.4 and the former release of 49.2. A figure below 50.0 is itself considered a contraction. It is worth mentioning that China is the largest importer of oil in the world and weak economic activities in China would have a significant impact on the oil price.

Meanwhile, the US Dollar Index (DXY) has found some cushion near 104.20 ahead of the US Employment data, which will provide guidance about the Fed’s interest rate policy.

Later this weekend, the OPEC meeting will remain in focus as oil-producing nations are expected to announce more supply cuts to support energy prices. Tensions between Russia and Saudi Arabia have remained elevated as the former has disrespected the pledge and pumping cheap oil into the global economy. The notion of production cuts by OPEC+ could be faded if Moscow continues to deliver oil at cheaper rates.

Regarding oil outlook, economists at Rabobank cited “Right now, we see OPEC+ staying the course and continuing the April cuts of 1.6m bpd. The surprise April cut boosted prices by $5-$7 for about three weeks. A second cut would display their fears more openly and indicates greater weakness; we construe a second cut as a bearish signal unless the cuts are extremely substantive.”

Going forward, oil inventory data for the week ending May 26 by the US Energy Information Administration (EIA) will be keenly watched. Investors should note that US American Petroleum Institute (API) reported a build-up of oil stockpiles on Tuesday by 5.202M barrels.