U.S. West Texas Intermediate crude oil futures are trading lower as investors braced for the possible return of sanctioned Iranian oil exports to global markets and on worries that rising U.S. interest rates would weaken fuel demand.
On a positive note, despite uncertainty over the pace of rate hikes in the United States to tackle soaring inflation, worries about oil demand destruction eased this week, putting the benchmark oil contract on track for gains of around 2% on the week.
Negatively speaking, however, traders are worried about an Iran Nuclear Deal that will bring more oil to the market and could drive prices sharply lower over the near-term. Traders seem reluctant to explore the long side of the market aggressively until this matter is settled. No one wants to get caught on the wrong side of the market if and when the headline announcing the deal is released.
Traders have also been reluctant to step in front of a highly anticipated speech from Fed Chair Jerome Powell on Friday. Powell is expected to summarize where the Fed stands in its fight to control inflation, including information about its rate-path hike in the long and short-term. An extremely hawkish Powell could sink the market.
Earlier in the week, U.S. West Texas Intermediate crude oil futures hit a three-week high as the focus continued to shift away from demand issues with traders now monitoring closely events pointing toward supply tightness. These events include disruptions to Russian exports, the potential for major producers to cut output, and the partial shutdown of a U.S. refinery.
Drop in US Crude Stockpiles Underpins Prices; Gasoline Demand Worrisome
Falling U.S. crude and product stockpiles also added to the upward pressure on prices. Oil inventories fell by 3.3 million barrels in the week to August 19 at 421.7 million barrels, steeper than analysts’ expectations in a Reuters poll for a 933,000-barrel drop.
The bullish impact was countered by a drawdown in gasoline inventories that was less than expected. On Tuesday, the American Petroleum Institute (API) reported a gasoline inventory build. Both reports indicate tepid demand. U.S. gasoline stocks fell by 27,000 barrels in the week to 215.6 million barrels, compared with earlier expectations for a 1.5 million-barrel drop.
Talk of OPEC+ Output Cuts Creates Floor
Crude oil prices have been climbing since Monday after the Saudi energy minister flagged the possibility that OPEC and its allies will cut production to support prices. This serves as evidence of the group’s willingness to defend prices.
Although OPEC+ hasn’t announced the mechanics of the proposed cut in production, just the mere mention of it has put a floor under the market.
British Petroleum Shuts Down Some Refinery Units
Reuters reported on Thursday that the world’s biggest oil consumer, BP, announced the shutting of some units at its Whiting refinery in Indiana after an electrical fire on Wednesday. Traders are still monitoring the situation but if the issue escalates, it could have a material impact on supply since the 430,000 barrel-per-day plant is a key supplier of fuels to the central United States and the city of Chicago.
Weekly Technical Analysis
Weekly October WTI Crude Oil
Trend Indicator Analysis
The main trend is up according to the weekly swing chart. However, momentum is trending lower.
The minor trend is down. It changed to down eight weeks ago when sellers took out the minor bottom at $97.77. This shifted momentum to the downside. The new minor top is $99.75. A trade through this price will change the minor trend to up and shift momentum to the upside.
Retracement Level Analysis
The main range is $61.08 to $115.44. The market has successfully tested its retracement zone at $88.16 to $81.74 for four weeks in a row.
The first minor range is $99.75 to $85.37. Its pivot is potential resistance at $92.56.
The second minor range is $108.07 to $85.37. Its 50% level at $96.72 is also resistance.
The short-term range is $115.44 to $85.37. If the minor trend changes to up then look for the rally to extend into its retracement zone at $100.41 to $103.95.
Weekly Technical Forecast
The direction of the October WTI crude oil market the week ending September 2 will be determined by trader reaction to the main 50% level at $92.56.
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Bullish Scenario
A sustained move over $92.56 will indicate the presence of buyers. If this move creates enough upside momentum then look for a rally into the second minor pivot at $96.72 and the short-term retracement zone at $100.41 to $103.95.
Bearish Scenario
A sustained move under $92.56 will indicate the presence of sellers. This could lead to a test of the long-term support at $88.16. This is followed by the minor bottom at $85.37 and the long-term Fibonacci level at $81.74. This price is a potential trigger point for an acceleration to the downside.
Short-Term Outlook
There was enough bullish news this week to send prices sharply higher, but right now traders have to settle for it being strong enough to provide support. Worries of a nuclear deal between Iran and Western powerhouses could also be limiting gains.
Although talks between the European Union, the United States, and Iran are continuing, the market appears to be trading as if the delay in reaching the agreement is nearly a done deal.
If signed, Iran will bring upwards of about 1 million barrels per day of crude to the market. Prices could be pressured over the short-run, but over the long term, it won’t be enough to offset the loss of Russian output.
Furthermore, if prices fall too far, too fast, OPEC+ is more likely to trim its output.
