Oil Unlikely To Rally Much Higher This Summer

U.S. West Texas Intermediate crude oil is trading higher on Friday, but down for the week. Thursday’s steep drop also wiped out most of market’s monthly gain. Although the foundation is there for higher prices before the end of the year, the short-term outlook is a little bleak, suggesting we could be headed for weeks of sideways price action.

After hitting a four-month high on July 21, the price action toward the end of this week clearly shows that investors are becoming more concerned about demand. One might suggest that prices would be a lot lower had it not been for a plunge to two-year lows by the U.S. Dollar. A falling dollar tends to increase foreign demand for dollar-denominated crude oil.

Meanwhile, a Reuters poll released on Friday showed that oil prices are set for a slow crawl upward this year as the gradual easing of coronavirus-led restrictions buoy demand, while a potential second COVID-19 wave could slow the pace of recovery.

The survey of 43 analysts and economists forecast benchmark Brent crude to average $41.50 a barrel in 2020, up slightly from the $40.41 consensus in last month’s survey and compared with around $42 average for the benchmark thus far this year. It is expected to average $49.85 in 2021.

The 2020 outlook for West Texas Intermediate rose to $37.51 per barrel from June’s $36.10.

The poll projected global demand to contract by between 7.2 and 8.5 million barrels per day (bpd) this year, versus last month’s 6.5-8.7 million bpd prediction. The International Energy Agency raised its 2020 demand forecast earlier this month to 92.1 bpd.

Further evidence of weak demand on oil prices was seen earlier this week when the Energy Information Administration (EIA) reported a nearly 11 million barrel crude oil drawdown and prices went down. The selling was generated by unexpected builds in gasoline and distillate supply.

Gasoline inventories could continue to build if consumers decide to voluntarily stay at home, if states order lockdowns and if the unemployment situation worsens. With air travel at a standstill, it is expected to take at least a year for jet fuel demand to rebound to normal levels.

Short-Term Fundamental Outlook

Prices could remain essentially rangebound over the near-term until major strides are made on the demand side of the crude oil equation. On the supply side, things seem to be moving in the right direction with the extension of the OPEC+ production cuts although they are expected to be tapered from August 1 until the end of the year.

The problem is with the demand side where uncertainty rages over whether the re-opening of the global economy will be impeded.

It seems the development of a successful vaccine against coronavirus may be necessary to fast-track an economic recovery and in turn boost oil prices. Without a vaccine, the recovery is likely to be rocky, leading to a series of stops and starts in the next crude oil rally.

Supply shouldn’t be that much of a concern because if demand drops enough, OPEC+ could easily order further production cuts and scrap its plan to begin tapering.

Weekly Technical Analysis

Weekly September WTI Crude Oil

Trend Indicator Analysis

The main trend is up according to the weekly swing chart. A trade through $42.51 will signal a resumption of the uptrend. A move through $35.01 will change the main trend to down.

The main range is $61.44 to $21.99. Its 50% to 61.80% retracement zone at $41.72 to $46.37 is the major resistance.

The minor range is $35.01 to $42.51. Its 50% level at $38.76 is support. It is controlling the near-term direction of the market.

The short-term range is $21.99 to $42.51. If the main trend changes to down then its retracement zone at $32.25 to $29.83 will become the primary downside target. This should be considered a value zone so look for buyers to return on a test of this area.

Weekly Technical Forecast

Based on this week’s price action, the direction of the September WTI crude oil market is likely to be determined by trader reaction to the pair of 50% levels at $41.72 and $38.76. Sitting between these levels will continue to generate a choppy, sideways trade.

Bullish Scenario

A sustained move over $41.72 will indicate the presence of buyers. This should lead to a quick test of the minor top at $42.51. Taking out this level could trigger an acceleration to the upside since the weekly chart indicates there is no resistance until $46.37.

Bearish Scenario

A sustained move under $38.76 will signal the presence of sellers. If this move creates enough downside momentum then look for an eventual break into the main bottom at $35.01. Not only is this price a change in trend level, but it is also the trigger point for an acceleration to the downside.

If the main trend changes to down then look for the selling to possibly extend into the short-term retracement zone at $32.25 to $29.83. Look for fresh buyers on a test of this area since it represents value.

Technical Summary

Basically, we’re looking for an upside bias to begin on a sustained move over $41.72 and for a downside bias to start on a sustained move under $38.76.

By sustained move we mean the breakouts through these levels are accompanied by supportive volume. There has to be actual buying or selling on breakout moves and strong volume will tell us if there is. Hitting buy stops or sell stops will not be enough to generate the size of the breakout moves we are looking for.

On the fundamental side, the anticipated breakouts are likely to be headline-driven.