October West Texas Intermediate Crude oil futures posted a volatile trade on Thursday on top of a bearish weekly performance. The price action reflected a myriad of factors from economic data to geopolitical shifts.
Demand Worries from Economic Data
Concerns about global economic health cast a shadow over oil prices. Weak figures from major economies, including Japan's shrinking factory activity, declining business activity in the Eurozone, and Britain's potential economic contraction, have heightened demand anxieties. Even in the U.S., economic growth seemed to hover near stagnation in August. All eyes are now on U.S. Federal Reserve Chair Jerome Powell, whose speech at the Fed’s Jackson Hole Symposium on Friday is keenly awaited by investors, given the implications for the broader economy.
U.S. Dollar Strength
As Federal Reserve Chair Jerome Powell gears up for his speech at the Jackson Hole symposium, the trading world waits with bated breath. There's rising concern that a hawkish tilt from the Federal Reserve could boost the dollar, making oil costlier and subsequently suppressing demand. A robust dollar invariably means higher oil prices for holders of other currencies, affecting demand dynamics. Given the hints of the Federal Reserve adopting a more assertive approach and the prevailing uncertainties about U.S. interest rates, the trajectory of the dollar remains crucial in shaping the oil market landscape.
Supply Dynamics
On the supply…
October West Texas Intermediate Crude oil futures posted a volatile trade on Thursday on top of a bearish weekly performance. The price action reflected a myriad of factors from economic data to geopolitical shifts.
Demand Worries from Economic Data
Concerns about global economic health cast a shadow over oil prices. Weak figures from major economies, including Japan's shrinking factory activity, declining business activity in the Eurozone, and Britain's potential economic contraction, have heightened demand anxieties. Even in the U.S., economic growth seemed to hover near stagnation in August. All eyes are now on U.S. Federal Reserve Chair Jerome Powell, whose speech at the Fed’s Jackson Hole Symposium on Friday is keenly awaited by investors, given the implications for the broader economy.
U.S. Dollar Strength
As Federal Reserve Chair Jerome Powell gears up for his speech at the Jackson Hole symposium, the trading world waits with bated breath. There's rising concern that a hawkish tilt from the Federal Reserve could boost the dollar, making oil costlier and subsequently suppressing demand. A robust dollar invariably means higher oil prices for holders of other currencies, affecting demand dynamics. Given the hints of the Federal Reserve adopting a more assertive approach and the prevailing uncertainties about U.S. interest rates, the trajectory of the dollar remains crucial in shaping the oil market landscape.
Supply Dynamics
On the supply front, Iran, defying U.S. sanctions, anticipates that its crude oil output will hit 3.4 million barrels per day by September-end. Simultaneously, the U.S. is contemplating easing sanctions on Venezuela, contingent on democratic elections. While geopolitical shifts can adjust supply dynamics, Saudi Arabia’s commitment to extending its 1 million bpd voluntary production cut into October offers some stability.
Inventory Data
U.S. crude inventories took the market by surprise, plummeting by 6.1 million barrels in the week ending August 18, significantly outpacing Reuters' anticipated 2.8 million-barrel reduction. This stark drop, coupled with diminishing gasoil stocks in Europe, hints at an upward nudge for oil prices. As U.S. refinery activities soar to peaks not seen since January 2020 and crude production escalates to 12.8 million bpd—the highest since March 2020—the dwindling inventories underscore the intricacies of the current oil market dynamics.
China's Role
China's role in the oil market is pivotal yet unpredictable. Despite initial optimism that China would drive oil demand, economic hiccups have dimmed those prospects. An unexpected decision by China's central bank to trim its one-year lending rate signals underlying economic hurdles, potentially impacting oil demand. However, China's vast crude oil reserves, accumulated earlier, act as a buffer for global prices.
China's economic trajectory, marked by property downturns and faltering credit growth, affects its oil consumption patterns. With a dip in imports from Saudi Arabia, China is tapping into its substantial inventories, a strategy likely influenced by heightened prices due to OPEC+ supply restrictions.
Weekly Technical Analysis
Weekly October WTI Crude Oil
Trend Indicator Analysis
The main trend is up according to the weekly swing chart. A trade through $84.16 and $85.03 will reaffirm the uptrend. The main trend will change to down if sellers take out the swing bottom at $64.42.
Retracement Level Analysis
The contract range is $37.88 to $95.40. Its retracement zone at $66.64 to $59.85 is the major support.
The intermediate range is $95.40 to $64.42. The market is currently facing a challenge at its retracement zone at $79.91 to $83.57. A sustained move over the upper level at $83.57 will indicate the buying is getting stronger. A break back under $79.91 won’t change the trend, but it will be a sign of weakness, probably linked to profit-taking or demand concerns.
The minor range is $64.42 to $84.16. Its retracement zone support is $74.29 to $71.96. This is the primary downside target and near-term value zone.
Weekly Technical Forecast
The direction of the October WTI crude oil market the week-ending September 1 is likely to be determined by trader reaction to the intermediate 50% level at $79.91.
Bullish Scenario
A sustained move over $79.91 will signal the presence of buyers. This could create the momentum needed to take out the Fibonacci level at $83.57, followed by the main tops at $84.16 and $85.03. A move through the main top at $85.03 will reaffirm the uptrend and could trigger an acceleration to the upside with the contract high at $95.40 the next major target price.
Bearish Scenario
A sustained move under $79.91 will indicate the presence of sellers. This could trigger a steep break into the minor retracement zone at $74.29 to $71.96. This is a value zone so with the main trend up, new buyers are likely to step in to buy.
Short-term Forecast
The oil market is currently caught in a delicate balance. Economic uncertainties and Federal Reserve's stance might curb demand, while supply dynamics and declining inventories suggest a tight market. Despite the bullish sentiment, the market seems prone to short-term corrections.
Decisions by the U.S. Federal Reserve and China's economic path will play a pivotal role. In essence, the oil landscape will be shaped by global geopolitics, economic indicators, and investor sentiments, making short-term predictions challenging. Traders are likely to remain vigilant, awaiting key macroeconomic cues to decipher future trends.
Technical traders should observe that the 50% level at $79.91 is the key pivot controlling the direction of the market. It represents the mid-point of the June 2022 top and the March 2023 bottom.
Given the current fundamentals, it’s hard to find a reason to chase crude oil prices at current levels. Therefore, it’s beginning to look as if longer-term buyers are committing to re-entering the market at a more favorable price. This supports the notion of a near-term pullback into the value zone at $74.29 to $71.96.
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