Oil

Why Oil Prices Could Spike Next Week

U.S. West Texas Intermediate crude oil futures are trading higher on Friday on reports that OPEC and its allies will ignore President Biden’s request to boost supply at next week’s production meeting. A weaker U.S. Dollar and stronger risk sentiment is also lending support at the close of the week.

Crude oil traders have been reacting positively to the hope that U.S. monetary tightening would not be as hawkish as initially expected after disappointing economic growth figures were released on Thursday.

Another big event driving the price action is that front-month Brent futures are selling at a rising premium to the deferred months in a market structure known as backwardation, indicating tight current supply.

This is being caused by the tight supply situation in Europe due to sanctions against Russia, and its slowdown of supply to a key pipeline into Germany.

Chances of OPEC+ Supply Boost Dim

The next surge in prices could come next week after the meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, together known as OPEC+, on August 3.

OPEC+ sources told Reuters the group will consider keeping oil output unchanged for September, with two OPEC+ sources saying a modest increase would be discussed.

The decision not to raise output would dampen U.S. efforts to drive down domestic gasoline prices after U.S. President Joe Biden visited Saudi Arabia this month hoping to strike a deal…

U.S. West Texas Intermediate crude oil futures are trading higher on Friday on reports that OPEC and its allies will ignore President Biden’s request to boost supply at next week’s production meeting. A weaker U.S. Dollar and stronger risk sentiment is also lending support at the close of the week.

Crude oil traders have been reacting positively to the hope that U.S. monetary tightening would not be as hawkish as initially expected after disappointing economic growth figures were released on Thursday.

Another big event driving the price action is that front-month Brent futures are selling at a rising premium to the deferred months in a market structure known as backwardation, indicating tight current supply.

This is being caused by the tight supply situation in Europe due to sanctions against Russia, and its slowdown of supply to a key pipeline into Germany.

Chances of OPEC+ Supply Boost Dim

The next surge in prices could come next week after the meeting of the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, together known as OPEC+, on August 3.

OPEC+ sources told Reuters the group will consider keeping oil output unchanged for September, with two OPEC+ sources saying a modest increase would be discussed.

The decision not to raise output would dampen U.S. efforts to drive down domestic gasoline prices after U.S. President Joe Biden visited Saudi Arabia this month hoping to strike a deal to open the taps.

The general consensus among analysts is that it would be difficult for OPEC+ to boost supply, given that many producers are already struggling to meet production quotas.

Weak GDP Pressures US Dollar

The U.S. Dollar is trading lower against a basket of major currencies early Friday as traders continued to react to data showing the U.S. economy contracted again in the second quarter, fueling speculation that the Federal Reserve will not raise rates as aggressively as previously expected.

On the economic front, data showed on Thursday that gross domestic product fell at a 0.9% annualized rate in the second quarter. Consumer spending grew at its slowest pace in two years and business spending contracted, raising the risk that the economy was on the cusp of a recession. Economists polled by Reuters had forecast GDP rebounding at a 0.5% rate.

A weaker greenback tends to drive up foreign demand for dollar-denominated crude oil.

Risk Sentiment Underpins Prices

Crude oil is getting a jolt from improving risk sentiment as recession fears retreat following ongoing U.S. earnings optimism and less-hawkish Fed chatter on future rate hikes.

The U.S. Federal Reserve on Wednesday raised its benchmark overnight interest rate by 75 basis points, in line with expectations, to combat red-hot inflation, while Fed Chair Powell added the central bank will be making rate hike decisions on a meeting-by-meeting basis.

In addition, the Fed also said the U.S. economy is not in recession as “there are just too many areas of the economy that are performing too well.”

Powell’s comments, suggesting a slower hiking path, weighed on the U.S. Dollar, boosting demand for dollar-denominated crude oil.

Drop in Stockpiles, Exports Surge Provides Added Boost

Traders are still reacting positively to Wednesday’s bullish government inventories report that revealed U.S. crude exports surged to an all-time high last week. The move contributed to another drop in stockpiles and was primarily driven by overseas demand due to the big discount for U.S. crude when compared with international-favorite Brent.

Crude inventories dropped 4.5 million barrels to 422.1 million barrels in the week ended July 22, the U.S. Energy Information Administration said on Wednesday, compared with expectations for a 1 million-barrel drop. The decline was in large part the result of a surge in crude exports to a record 4.5 million barrels per day in the latest week.

U.S. crude production also rebounded to 12.1 million bpd after two weeks of declines, rising 200,000 bpd in its biggest increase since December.

U.S. gasoline stocks also fell by 3.3 million barrels on the week, and distillate stockpiles, which include diesel and heating oil, fell by 784,000 barrels.

Weekly Technical Analysis

Weekly September WTI Crude Oil

Trend Indicator Analysis        

The main trend is up according to the weekly swing chart. However, momentum is trending lower following the confirmation of the closing price reversal top from the week-ending the week-ending June 17.

The minor trend is down. It changed to down three weeks ago when sellers took out the minor bottom at $99.66. This confirmed the shift in momentum. The new minor top is $111.14. A trade through this price will change the minor trend to up and shift momentum to the upside.

Retracement Level Analysis

The intermediate range is $60.99 to $118.08. Its retracement zone at $89.54 to $82.80 is support. This area stopped the selling at $88.23 on July 14.

The main range is also the contract range at $35.00 to $118.08. Its retracement zone at $76.54 to $66.74 is the major area controlling the long-term direction of the market.

On the upside, the minor range is $111.14 to $88.23. Its 50% level or pivot is potential resistance at $99.69. The short-term range is $118.08 to $88.23. Its retracement zone at $103.16 to $106.68 is the most important resistance area.

Weekly Technical Forecast

The direction of the September WTI crude oil market the week-ending August 5 will be determined by trader reaction to the minor 50% level at $99.69.

Bullish Scenario

A sustained move over $99.69 will indicate the presence of buyers. If this move creates enough upside momentum then look for a rally into the short-term retracement zone at $103.16 to $106.68.

The key area standing in the way of a shift in momentum and a resumption of the uptrend is $103.16 to $106.68.

Bearish Scenario

A sustained move under $99.69 will indicate the presence of sellers. Taking out the two-week low at $88.23 and the minor bottom at $85.37 will indicate the selling pressure is getting stronger. This could lead to a test of the Fibonacci level at $82.80.

A failure to hold $82.80 will put the market in a weak position. This could extend the selling into the major retracement zone at $76.54 to $66.74. This is the last potential support before the main bottom at $60.99. A trade through this level will change the main trend to down.

Short-Term Outlook

Fundamentally, the market could continue to garner support amid speculation that exports could continue to rise, thanks to a wide spread between the U.S. and international crude benchmarks, particularly as Europe has reduced imports from its top supplier, Russia, in the wake of Moscow’s invasion of Ukraine and subsequent sanctions on that nation. Some analysts also think we could see 5 million-plus per day. In other words, we may have not seen peak oil globally.

Currently, the arbitrage or spread between Brent and U.S. West Texas Intermediate crude oil futures has widened out to more than $9 a barrel.

“International refiners will go to the United States to load up on U.S. crude oil, as long as the arb is so wide that it covers the cost of carry,” said Robert Yawger, executive director of energy futures at Mizuho.

Technically, despite the strengthening fundamentals, traders still face a wall of resistance from $99.69 to $106.68. So any rally is likely to be a labored event. 

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