USOil Analysis

China's economy has been revving up since it abandoned the strict pandemic containment measures and the latest data from earlier in the week showed that the recovery of the world's largest oil importer maintains its speed. GDP expanded by 4.5% y/y in the first quarter, while retail sales jumped 10.6% in March and Industrial production grew 3.9%.

The International Monetary Fund (IMF) retained its projection for 5.2% growth this year, earlier in the month - a much better performance, compared to the anemic 3% expansion of 2022 ^[1]. China's reopening is forecast to boost oil demand, with the International Energy Agency (IEA) expecting around half of its 2 million barrels/day growth forecast to come from the country. ^[2]

The agency also anticipates a supply deficit in the back-half of the year, due to the recent OPEC+ output cuts, which could have a negative impact on the global economic recovery. The IMF expects global growth to slow to 2.8% in 2023, from 3.4% last year ^[1]. Furthermore, Fed staff projects a "mild recession" in the US, due to the impact of last month's banking rout, as revealed by last week's minutes. ^[3]

Meanwhile inflation remains sticky, keeping the higher-for-longer narrative around interest rates alive, further fueling fears over economic slowdown. We recently saw hawkish commentary from some Fed officials, which strengthened market expectation for another hike and moderated optimism around cuts.

CPI figures from the UK today showed that headline inflation stayed above 10% for the seventh straight month in March, reinforcing the likelihood of further tightening by the Bank of England at the next meeting. Headline inflation in Eurozone decelerated sharply, but core ticked up, in a familiar pattern and ECB officials continue to offer hawkish signals for more rate increases.

The push and pull between prospects of tighter oil markets ahead and fears over demand due to economic slowdown persists. This week markets seem to focus on the latter, overlooking the strong data form China.

USOil slides and threatens the critical 77.70-00 region, where the EMA200, the ascending trendline from the 2023 lows and the daily Ichimokou Cloud converge. Daily closes below it would pause the upside bias, but a strong catalyst would be required for that, while 70.06 looks distant at this stage.

Despite this week's losses, USOil had set new 2023 highs and runs a profitable month, helped by prospect of tighter markets due to the OPEC+ cuts and demand from China. Above the aforementioned crtcal tech levels, bulls are in control and have the ability to set higher highs (83.55), but don't inspire much confidence for challenging 90.36.