Demand Concerns Counter Libya Outages in Volatile Week for Oil Prices

This week, crude oil prices experienced significant volatility driven by a mix of geopolitical tensions, supply disruptions, and economic concerns. The market's direction was heavily influenced by events in the Middle East, fluctuations in U.S. economic data, and ongoing issues in Libya, culminating in a mixed outlook by week's end.

Mideast Tensions and Libyan Supply Disruptions

Early in the week, crude oil prices surged by over 1% as tensions in the Middle East escalated, with fears that the ongoing conflict in Gaza might disrupt regional oil supplies. Over the weekend, Hezbollah's aggressive actions against Israel, including the firing of rockets and drones, exacerbated these concerns. While there was no immediate impact on oil production, the geopolitical risks were enough to push prices higher?.

Simultaneously, supply disruptions in Libya contributed to the market's volatility. On Thursday, it was reported that over half of Libya's oil production had been halted due to a standoff between rival political factions. This disruption, estimated at around 700,000 barrels per day, sparked fears of tighter global supplies. The situation in Libya remains precarious, with the risk of further production cuts reaching up to 1 million barrels per day??.

U.S. Economic Data and Federal Reserve Actions

U.S. economic data presented a mixed bag this week, further influencing oil prices. The potential for an interest rate cut by the U.S. Federal Reserve, hinted at by Federal Reserve Chair Jerome Powell, initially supported oil prices. Lower interest rates typically boost economic activity, which in turn can increase demand for oil. However, this optimism was tempered by disappointing data on global oil consumption growth and weak refinery profit margins, which indicated sluggish demand??.

Additionally, U.S. crude oil inventories fell by 846,000 barrels, a smaller decline than the anticipated 2.3 million barrels. This lower-than-expected drawdown added to concerns over demand, causing oil prices to dip after a brief rally earlier in the week??.

OPEC+ Production Decisions and Global Supply Outlook

The ongoing supply disruptions in Libya and the Middle East have prompted market participants to closely monitor OPEC+ production plans. With Libya's output potentially down by nearly 1 million barrels per day, OPEC+ faces a critical decision in its upcoming meeting. If the disruptions continue, OPEC+ may choose to delay any planned production increases to prevent further price declines. However, any reduction in Libyan disruptions or easing of geopolitical tensions could complicate these decisions??.

Weekly Light Crude Oil Futures

Trend Indicator Analysis

The main trend is up, but the secondary lower tops at $83.66 and $81.94 are signs of a weakening trend.  A trade through $78.99 will shift momentum back to the upside. A move through $70.50 will reaffirm the weakening momentum. The main trend will change to down on a move through $69.50.

As of Thursday's close, the market is trading higher for the week, putting it in a position to break a two-week losing streak.

The short-term range is $83.66 to $69.50 with a pivot at $76.58. The minor range is $69.50 to $81.94 with a pivot at $75.72. The two pivots form an important price cluster that can control the direction of the trade over the near-term. This week, traders spent a lot of time straddling the pivot area as they tried to establish a direction.

The strongest retracement zone at $73.43 to $71.02 is solid support. It is essentially controlling the intermediate-term direction of the market, offering hope for the bulls and a potential trigger point for a steep decline for the bears.

Additionally, the five-week trade between the 50% levels at $73.43 and $76.58 suggest a rangebound trade with traders mirroring the on-going battle between supply and demand forces.

The recent price action clearly indicates that traders believe $70.50 to $69.50 is a value area.

Weekly Technical Forecast

The direction of the Weekly Light Crude Oil Futures market the week-ending September 6 is likely to be determined by trader reaction to $75.00.

Bullish Scenario

A sustained move over $75.00 will signal the presence of strong buyers. If this creates enough near-term momentum then we could see another test of $76.58 to $78.25. The latter is a potential trigger point for an acceleration into $78.99, followed by $81.94.

Bearish Scenario

A sustained move under $75.00 will indicate the presence of sellers. If it generates enough downside momentum then we could see a retest of the major support zone at $73.43 to $71.02, followed by the minor bottom at $70.50 and the main bottom at $69.50. If the main bottom fails to hold then look out to the downside.

Market Forecast: Mixed Outlook with Potential for Volatility

Given the current market conditions, the outlook for crude oil prices remains mixed. On one hand, the demand outlook is bearish, particularly with ongoing concerns over global economic growth and weaker-than-expected oil consumption. However, the possibility of significant supply disruptions in Libya and the Middle East is keeping traders on edge, allowing for speculative buying that could lead to periodic short-covering rallies.

This situation creates a market environment where prices are likely to experience volatility, driven by the push and pull of demand concerns versus supply risks. Traders should remain alert to developments in both economic data and geopolitical events, as these will be crucial in determining the market's next moves.

Technically, the crude oil market is rangebound with the retracement zone at $76.58 to $78.25 providing resistance and the retracement area at $73.43 to $71.02 providing support.

After observing choppy, two-sided trading throughout the week, it appears that $75.00 is the balance point, which will dictate the direction of the market next week.