U.S. West Texas Intermediate crude futures traded higher on Friday on reports that OPEC and its allies will ignore President Biden’s demand to increase supplies at next week’s production meeting. A weaker US dollar and stronger risk-on sentiment also provide support at the end of the week.
Crude oil traders reacted positively on hopes that US monetary tightening will not be as hawkish as initially expected after disappointing economic growth data was released on Thursday.
Another major event driving price action is front-month Brent futures selling at an increasing premium to forward months in a market structure known as backwardation, which indicates limited current supply.
This is due to the tight supply situation in Europe due to the sanctions against Russia and delays in the supply of a key pipeline to Germany.
The chances of OPEC+ supply increases are slim
The next spike in prices could come next week after the meeting of the Organization of the Petroleum Exporting Countries (OPEC) and its Russian-led allies, collectively known as OPEC+, on August 3.
OPEC+ sources told Reuters the group would consider keeping oil output unchanged for September, with two OPEC+ sources saying a moderate increase would be discussed.
A decision not to increase production would hamper U.S. efforts to lower domestic gasoline prices after U.S. President Joe Biden visited Saudi Arabia this month in hopes of striking a deal…
U.S. West Texas Intermediate crude futures traded higher on Friday on reports that OPEC and its allies will ignore President Biden’s demand to increase supplies at next week’s production meeting. A weaker US dollar and stronger risk-on sentiment also provide support at the end of the week.
Crude oil traders reacted positively on hopes that US monetary tightening will not be as hawkish as initially expected after disappointing economic growth data was released on Thursday.
Another major event driving price action is front-month Brent futures selling at an increasing premium to forward months in a market structure known as backwardation, which indicates limited current supply.
This is due to the tight supply situation in Europe due to the sanctions against Russia and delays in the supply of a key pipeline to Germany.
The chances of OPEC+ supply increases are slim
The next spike in prices could come next week after the meeting of the Organization of the Petroleum Exporting Countries (OPEC) and its Russian-led allies, collectively known as OPEC+, on August 3.
OPEC+ sources told Reuters the group would consider keeping oil output unchanged for September, with two OPEC+ sources saying a moderate increase would be discussed.
A decision not to increase output would derail U.S. efforts to lower domestic gasoline prices after U.S. President Joe Biden visited Saudi Arabia this month in hopes of striking a deal to open the taps.
The general consensus among analysts is that it would be difficult for OPEC+ to increase supply, given that many producers are already struggling to meet production quotas.
Weak GDP puts pressure on the US dollar
The U.S. dollar traded lower against a basket of major currencies early Friday as traders continued to react to data showing the U.S. economy shrank again in the second quarter, fueling speculation the Federal Reserve will not raise interest rates as aggressively , as previously expected.
On the economic front, Thursday’s data showed gross domestic product contracted at a 0.9 percent annual rate in the second quarter. Consumer spending rose at its slowest pace in two years and business spending shrank, raising the risk that the economy is on the brink of recession. Economists polled by Reuters had forecast a GDP recovery of 0.5%.
A weaker dollar tends to boost foreign demand for dollar-denominated crude oil.
Risk sentiment underpins prices
Crude oil took a hit from improving risk sentiment as recession fears receded following continued optimism about US earnings and less bullish chatter from the Fed about 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 hot inflation, while Fed Chairman Powell added that the central bank will decide on rate hikes at a meeting on an appointment basis.
In addition, the Fed also said that the US economy is not in recession because “there are too many areas of the economy that are performing too well.”
Powell’s comments, which suggested a slower footpath, weighed on the US dollar, boosting demand for dollar-denominated crude oil.
Declining inventories, rising exports provide additional impetus
Traders are still reacting positively to Wednesday’s upbeat government inventories report, which revealed that US crude oil exports jumped to a record high last week. The move contributed to another fall in inventories and was driven mainly by overseas demand due to the steep discount to US crude compared to international favorite Brent.
Crude oil inventories fell 4.5 million barrels to 422.1 million barrels in the week ended July 22, the US Energy Information Administration said on Wednesday, compared with expectations for a 1 million barrel drop. The decline was largely the result of a surge in crude oil exports to a record 4.5 million barrels per day in the past week.
U.S. crude output also rebounded to 12.1 million barrels a day after two weeks of declines, rising by 200,000 barrels a day in its biggest increase since December.
U.S. gasoline inventories also fell by 3.3 million barrels on the week, and distillate inventories, which include diesel and fuel 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, the momentum is easing after the confirmation of the top of the price reversal at the end of the week to the end of the week of June 17.
The slight trend is down. It changed to the downside three weeks ago when sellers took out the minor low at $99.66. This confirmed the change in momentum. The new low high is $111.14. A trade through this price will reverse the minor uptrend and shift the momentum to the upside.
Analysis of the level of correction
The intermediate range is $60.99 to $118.08. Its correction zone of $89.54 to $82.80 is support. This area stopped selling at $88.23 on July 14.
The main range is also the range of the contract from $35.00 to $118.08. Its correction zone of $76.54 to $66.74 is the main area controlling the market’s long-term direction.
On the upside, the small 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 correction zone from $103.16 to $106.68 is the most important resistance zone.
Weekly technical forecast
The direction of the September WTI crude oil market at the end of the week of August 5 will be determined by the trader’s reaction to the minor 50% level at $99.69.
Rising scenario
A sustained move above $99.69 would indicate the presence of buyers. If this move creates enough upside momentum, then look for a rally in the short-term correction zone at $103.16 to $106.68.
The key zone standing in the way of a momentum reversal and resumption of the uptrend is $103.16 to $106.68.
A bearish scenario
A sustained move below $99.69 would indicate the presence of sellers. Taking out the two-week low at $88.23 and the minor low at $85.37 would indicate that 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 selling into the main correction zone from $76.54 to $66.74. This is the last potential support before the major bottom at $60.99. A trade through this level will reverse the main trend down.
Short term perspective
In general, the market may continue to gain support amid speculation that exports may continue to rise, thanks to a wide spread between US and international crude oil benchmarks, especially after Europe reduced imports from its biggest supplier, Russia. following Moscow’s invasion of Ukraine and subsequent sanctions against that nation. Some analysts also believe we could see over 5 million per day. In other words, we may not have seen peak oil globally.
Currently, the arbitrage or spread between Brent futures and US West Texas Intermediate crude has widened to over $9 a barrel.
“International refiners will go to the United States to load up on US crude as long as the arb is wide enough to cover the cost of carrying it,” said Robert Yauger, executive director of energy futures at Mizuho.
Technically, despite strengthening fundamentals, traders still face a wall of resistance from $99.69 to $106.68. So any rally is likely to be a tough event.
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