Investopedia/Gary Ashton: Crude Oil Price Forecast: China in Focus

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Crude Oil Price Forecast: China in Focus

By Gary Ashton | Updated March 25, 2018 — 6:00 AM EDT
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Oil prices ended the past week up more than 5% at $65.81 per barrel owing to headlines suggesting that near-term supplies could be jeopardized.

On Friday, news broke that OPEC could maintain production curbs into 2019. Earlier in the week, Saudi Arabia warned that it will develop its own nuclear weapon if regional rival Iran acquires one. John Bolton on Thursday was named national security advisor by President Trump. Mr. Bolton is a known Iran hawk, and this concerned analysts that new U.S. oil sanctions could soon be facing Tehran. To cap things off, weekly U.S. oil inventory data showed a decline of 2.622 million barrels while analysts were expecting an increase of the same amount.

Chart showing the change in U.S. crude oil stocks

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China Trade Tensions

Next week, traders are likely to focus on the growing trade tensions with China. Last week, President Trump levied about $60 billion in tariffs on imports from China. In a measured response, Beijing imposed higher duties on $3 billion in U.S. goods, including recycled aluminum and steel pipes. The U.S. tariffs raised concern that the barriers to trade on steel could hurt the oil industry due to the coming need for the metal to build new pipelines and other oil-related infrastructure.

The Trump administration introduced the tariffs in an attempt to improve America's $375 billion Chinese trade deficit and protect American intellectual property. Another way the administration hopes to improve the terms of trade is by selling more American-produced energy to China. According to the U.S. Census Bureau, China bought around $7 billion worth of American oil and gas in 2017. Secretary of Commerce Wilbur Ross hopes to improve this. He recently suggested that China could buy more U.S. made liquified natural gas (LNG) by diverting its purchases from other countries to the U.S.

China is already the second-largest recipient of U.S. crude oil exports after Canada. Some 20% of U.S. crude oil exports went to China in 2017, according to Energy Information Administration data. The Trump administration will likely be pushing for this amount to increase in any round of Chinese trade negotiations that follow from the tariff dispute.

Chart showing breakdown of U.S. crude oil export destinations
Oil Prices in Near-Term Recovery

This week's price action was marked with three solid green candles on the daily chart on Tuesday, Wednesday and Friday in reaction to headlines highlighting risks to near-term oil supplies. This development has completely negated the downward price pressure witnessed in early February.

Looking at the daily price action, oil is presently positive using a combination of moving averages and technical indicators. For example, the 21-day exponential moving average is pulling away from the 55-day exponential moving average, while on the technical side, the moving average convergence divergence (MACD) fast line remains firmly above zero after crossing that threshold on March 20. The broad picture for oil is now generally bullish, and a close above the Jan. 25 high of $66.66 per barrel would signal a full reversal to the early February 2018 downtrend.

Technical chart showing the performance of crude oil

On a longer-term weekly chart, the picture is even more bullish, with a solid green candle for the week that completely engulfs the previous six weeks and stands on the verge of a breakout above the near-term resistance level of $66.66 per barrel reached during the week of Jan. 22. This price also sits just below the 50% Fibonacci retracement of the downward price move from the June 2014 high of $107.73 per barrel to the February 2016 low of $26.05 per barrel. A close above this important technical level in the week ahead would open the door to testing the next weekly Fibonacci resistance level of $76.80 per barrel.

On the technical side, the weekly MACD fast line is decidedly above zero and is poised to cross the slow line, which would be another bullish indicator.

Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment or trading advice.
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