Oil’s Rally Undone as Demand Outlook Weakens

Key Takeaways:

*Oil spiked last Friday on a sharper-than-expected draw in U.S. inventories, but the rally quickly faded as traders questioned the sustainability of demand.

*Rising U.S. shale output and softer OPEC+ compliance are easing supply tightness, undermining the bullish narrative.

*Weakening manufacturing activity in China and Europe is casting doubt on forward demand, shifting risks toward the downside.

Market Summary:

Crude oil prices have lost upward momentum as traders weigh resilient U.S. demand against growing concerns over the global growth outlook. The latest EIA data showed a draw in crude and refined product inventories, which helped spark a sharp rally last Friday as traders initially read the numbers as evidence of stronger consumption. However, that spike quickly gave way to profit-taking, with markets questioning whether the drawdown reflected sustained demand or simply temporary shifts in refinery operations and shipping flows.

On the supply side, risks remain but are being reassessed by the market. OPEC+ has maintained discipline in curbing output, yet compliance among some members has softened, and non-OPEC producers like the U.S. continue to expand supply. Rising U.S. shale production, coupled with higher exports, has eased some of the tightness in the physical market. This incremental supply is keeping a lid on prices and dampening fears of a sustained shortage heading into year-end.

Adding to the bearish narrative, the broader macroeconomic backdrop is becoming less supportive. Signs of slowing manufacturing activity, particularly in China and Germany, suggest weaker forward demand for energy. If global trade remains under pressure, the demand side of the oil equation may weaken further, offsetting any bullish impulses from temporary supply disruptions. Investors are increasingly wary that oil’s resilience could falter if demand erosion becomes more pronounced.

For financial markets, a sustained pullback in crude prices would ease inflationary pressures, giving central banks greater scope to maintain or even accelerate policy easing. Such a dynamic could weaken currencies of oil exporters, while providing relief for energy-importing economies. Overall, while last Friday’s spike underscored oil’s sensitivity to short-term data shocks, the broader balance of risks for crude appears to be shifting toward the downside.

Technical Analysis 

USOIL, H4: 

Oil has staged a strong rebound after defending support at 63.20, breaking out of its recent consolidation and pushing above the 20-period moving average. The rally briefly tested resistance at 66.65, though price is now pulling back slightly. If buyers can hold above 64.90, momentum could reassert toward the next resistance at 68.55, with a further stretch toward 70.35 if bullish pressure accelerates. On the downside, failure to defend 64.90 risks re-exposing the 63.20 support area.

Momentum readings support the bullish tilt but signal caution that the RSI has eased from 64 after approaching overbought territory, suggesting room for consolidation, while the MACD remains positive, with a bullish crossover still intact above the signal line.

Overall, oil is in a constructive phase with upside potential, but near-term pullbacks are likely as traders test key support levels before committing to another leg higher.

Resistance level: 66.65, 68.55

Support level: 64.90, 63.20