Oil Tests Key Support Post US Inventory Build: 2 Factors to Keep an Eye on

Crude oil prices corrected after the EIA reported an inventory build of 1.2 million barrels for the week ending January 26.

In recent weeks, specific variables related to the geopolitical situation in the Middle East have come to the forefront.

The Red Sea basin, in particular, has drawn global attention as Houthi attacks on merchant ships persist despite intervention by the US-led coalition.

Counteracting concerns about the destabilization of a key trade route and demand pressures on oil prices are worries about an economic deceleration in China and a significant increase in US inventories.

These factors led to a correction in crude oil during yesterday's session, adding an element of risk to short-term forecasting due to the dynamic situation.

Let's take a look at the fundamental factors supporting the commodity's latest moves to better understand where we stand from a price-dynamic perspective.

The situation in the Red Sea basin is escalating again with a missile attack on a Russian tanker transporting crude oil, despite announcements that attacks will only be carried out against Israel's allies until the armed aggression in Gaza ends.

Beijing and Moscow may urge Tehran, which unofficially supports the Yemeni militants, to take action and compel the Houthis to make concessions as blocking one of the main trade routes could hinder China's efforts to regain rapid economic growth.

The European Union and individual European countries should also step in, among which Denmark, which has important interests in the developed maritime transport sector, is sending its ship.

Thus, the situation is becoming increasingly complicated and therefore much more difficult to predict.

In any case, in the most optimistic scenario, the international coalition together with political pressure mainly from China will force the Huti to stop attacks.

The pessimistic variant assumes further support for the rebels by Iran and the ineffectiveness of the Western coalition, which may convince carriers to abandon this route and cause a permanent increase in costs.

Although, oil demand overall rose by 2.3 mb/d to 101.7 mb/d in 2023, the latest quarter showed a marked deceleration of 400 kb/d, which may continue in the coming months as economic activity in the world's major economies declines.

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Meanwhile, the saga of the world's most indebted real estate developer Evergrande (HK:3333) continues.

A Hong Kong court's potential ruling to order the company's liquidation, following unsuccessful negotiations with creditors, looms as a potentially decisive blow.

It's important to note that this ruling is currently non-binding on mainland operations.

Given that the real estate sector is a primary driver of the Chinese economy, there exists a substantial risk that the crisis's spillover effect on the entire industry could significantly impact GDP growth.

This could in turn decrease demand, not only for commodities like copper but also for oil.

Brent crude oil's chart shows an ABCD formation, and the D point falls in confluence with a strong resistance area located in the price area of $84 per barrel.