Oil risks correction as traders digest lower demand prospects, big US inventory drawdowns

• Oil price ticks up slightly after snapping a four-day winning streak on Tuesday. 
• Traders saw a chunky overnight drawdown of 5.2 million barrels from the US American Petroleum Institute.
• The US Dollar Index weakens ahead of the US CPI release. 

Oil clings onto small gains on Wednesday, though pressure is building on the chart for more downside in crude prices after Tuesday’s slide. The chunky drawdown of 5.2 million barrels reported by the American Petroleum Institute (API) was able to give some counterweight to the selling pressure from Tuesday. The sell-off took place after the release of the Producer Price Index (PPI), which came in substantially softer than markets expected, jacking up expectations of another soft reading for the US Consumer Price Index (CPI) later today. 

The US Dollar Index (DXY), which tracks the performance of the US Dollar against six major currencies, faces selling pressure as well. The US CPI release for July is likely the most important data release for the week. Analysts expect the disinflationary path to continue,  and this scenario might bring more weakness for the US Dollar (USD). 

At the time of writing, Crude Oil (WTI) trades at $77.35 and Brent Crude at $80.68.

Oil news and market movers: All eyes on EIA for near-term moves

• The overnight US crude stock change number reported by the American Petroleum Institute (API) came in at a chunky 5.2 million barrels drawdown. This more than doubles the 2 million drawdown expected by analysts.
• The Energy Information Administration (EIA) will publish its stock change data at 14:30 GMT. Analysts expect to see a much smaller draw of 2 million barrels compared to the prior’s weeks drawdown of 3.728 million barrels.
• Bloomberg reported that the US has allowed the sale of missiles to Saudi Arabia, another step of escalation in the Middle Eastern region. 
• Meanwhile, retaliation from Iran against Israel is not taking place , creating a moment of easing tensions in the Gaza region as the main parties try to restart ceasefire talks. 

Oil Technical Analysis: Risk of rejection remains

Oil price has been shooting for the stars since Monday. The fact that both OPEC and the IEA are seeing substantial supply surplus has traders doubling down on changes from OPEC output, away from its commitment to reduce production limitations. The risk to that could be the big US drawdown numbers, leading to very brief rallies. Still, the broader trend seems to be to the downside. 

On the upside, the trifecta of moving averages are the main levels to watch. First up is the 200-day Simple Moving Averages (SMA) at $77.68. From there, the 55-day SMA comes into focus at $78.50. The last one comes in at $79.78, just ahead of $80.00, with the 100-day SMA, all residing in a very tight range. 

On the downside, a bigger movement could play out. First support comes in at $75.27, but that has been chopped up in July and August so it might have become less relevant. The low from August at $71.17 is the best level for a bounce. 

US WTI Crude Oil: Daily Chart