WTI Faces Volatile Start to the Year

Despite a positive start to the year, crude oil prices experienced significant volatility, with geopolitics likely to continue influencing the latest trend.

The Geopolitical Peak

Since bottoming out in early December, crude prices have been on an upward tear, with WTI climbing near $80 per barrel in early January. Traders were concerned that supply might not meet demand, not because demand was expected to surge, but due to OPEC+ adhering to its production cuts and the outgoing Biden Administration imposing the most stringent sanctions on Russian oil exports. However, the arrival of Donald Trump in the White House appears to have halted the WTI rally even before he assumed office.

On January 15, Israel and Hamas reached a ceasefire agreement facilitated by the Biden Administration but widely attributed to the willingness of both parties to secure a deal before Trump took office. Trump had threatened "hell to pay" if no agreement was reached before he took office. The temporary cessation of hostilities caused oil prices to retreat from multi-month highs, with WTI falling 1.4% in a single day and continuing this trend since then.

Choppy Waters Ahead

The conflict in Gaza had raised concerns about a broader escalation, which have primarily subsided following the collapse of the Assad regime in Syria. With the somewhat fragile ceasefire in place, there is hope that the Houthi rebels in Yemen will halt their attacks on shipping in the Suez Canal, which has disrupted transportation between the Middle East, Asia and Europe. However, even after just three days of truce, Trump is already expressing doubts about the longevity of the ceasefire. The new Administration at the White House has shown no interest in easing oil exports from Russia and is reportedly preparing plans to apply even greater pressure to secure a deal on Ukraine. Trump is also reportedly considering imposing sanctions on oil exports from Iran, which could curtail as much as 1 million barrels per day in exports.

Meanwhile, Trump is taking other actions that could keep the downward pressure on crude prices, including scrapping a series of restrictions on oil production from the former Biden Administration and threatening the EU with tariffs if they don't buy more oil from the US. China, the largest oil importer, is expected also to experience weaker growth this year, exacerbated by its commitment to expanding its renewable energy base. With the European economy essentially stagnating and the world's largest consumer of crude now the largest producer, crude prices could face downward pressure.

Bullish C&H Pattern

WTI oil could be forming the handle of a cup-and-handle (C&H) pattern near $75, a formation that often signals a potential continuation of the prevailing uptrend. If the pattern plays out as expected, a breakout above the cap peak of $79.40 could pave the way for further gains in WTI towards $84.60 and beyond. Conversely, if the recent price action prevails, a break below $72.80 could reopen the door to $65, provided intermediate support at $70 gives way to bears.

Source: SpreadEx / Light Crude

Key Takeaways

The recent ceasefire between Israel and Hamas and Trump's scrapping of oil production restrictions have eased concerns about supply disruptions, weighing on crude oil prices recently. However, the stance the new Administration holds on oil exports from Russia and Iran, coupled with potential growth concerns in major economies like China, could exert further downward pressure on crude prices in the near term unless notable changes from OPEC+ or the ceasefire deal add to the risk premium.