U.S. West Texas Intermediate crude oil futures are trading lower on Friday shortly after the release of a strong U.S. Non-Farm Payrolls report that suggests the U.S. is not in a recession and that the Fed is likely to continue on its aggressive rate hiking path.
Prices have come under pressure this week as the traders fretted over the impact of inflation on economic growth and demand, but tight supply has kept a floor under prices.
The price action throughout the week has been indicating that traders are taking the threat of recession far more seriously – meaning demand will take a hit, but today’s U.S. jobs report suggests the economy may not be headed that way. Furthermore, it could mean investors will shift their attention back to a market that is facing tight supply and producers with no capacity to change that.
Rising Rates Have Bulls Worried
After edging higher last week on worries over tightening supply, prices have fallen considerably this week on new concerns over too much supply due to weak fuel demand. The drop is fuel demand is correlated with rising interest rates that are slowing global economic growth.
If the correlation between rising interest rates and falling fuel demand continues then prices could drop a lot further since the major central banks are likely to continue to raise rates until at least September and possibly until the end of the year.
Rising U.S. rates are helping to underpin the U.S. Dollar, and…
U.S. West Texas Intermediate crude oil futures are trading lower on Friday shortly after the release of a strong U.S. Non-Farm Payrolls report that suggests the U.S. is not in a recession and that the Fed is likely to continue on its aggressive rate hiking path.
Prices have come under pressure this week as the traders fretted over the impact of inflation on economic growth and demand, but tight supply has kept a floor under prices.
The price action throughout the week has been indicating that traders are taking the threat of recession far more seriously – meaning demand will take a hit, but today’s U.S. jobs report suggests the economy may not be headed that way. Furthermore, it could mean investors will shift their attention back to a market that is facing tight supply and producers with no capacity to change that.
Rising Rates Have Bulls Worried
After edging higher last week on worries over tightening supply, prices have fallen considerably this week on new concerns over too much supply due to weak fuel demand. The drop is fuel demand is correlated with rising interest rates that are slowing global economic growth.
If the correlation between rising interest rates and falling fuel demand continues then prices could drop a lot further since the major central banks are likely to continue to raise rates until at least September and possibly until the end of the year.
Rising U.S. rates are helping to underpin the U.S. Dollar, and since crude oil is a dollar-denominated assets, foreign demand is dropping. This assessment comes only a week after Russia’s shutdown of key pipeline into Europe drove U.S. crude oil exports to a record level.
Too Little Demand Leads to Too Much Supply
Data released by U.S. Energy Information Administration (EIA) showed crude stockpiles in the U.S. rose by 4.5 million barrels last week versus expectations for a draw of 630,000 barrels.
Gasoline stockpiles increased by 163,000 barrels the week-ending July 29 against expectations for a drop of 1.61 million barrels.
Distillate stockpiles, which include diesel and heating oil, fell by 2.4 million barrels in the week to 109.3 million barrels, versus expectations for a 1 million-barrel rise, the EIA data showed.
Surprisingly, net crude imports rose by 2.21 million bpd, the EIA said. The week before, U.S. crude oil exports surged to an all-time high last week, contributing to another fall in stockpiles, driven by overseas demand due to the big discount for U.S. crude when compared with international benchmark Brent.
The decline in stockpiles last week 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.
Weekly Technical Analysis
Weekly September WTI Crude Oil
Trend Indicator Analysis
The main trend is up according to the weekly swing chart. However, momentum has been trending lower since the confirmation of the closing price reversal top the week-ending June 17.
The minor trend is down. It changed to down five 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. It’s currently being tested.
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 nearest resistance is a minor pivot at $99.23, followed by a short-term retracement zone at $102.70 to $106.33.
Weekly Technical Forecast
The direction of the September WTI crude oil market the week-ending August 12 will be determined by trader reaction to the main 50% level at $89.54.
Bullish Scenario
A sustained move over $89.54 will indicate the presence of buyers. If this move creates enough upside momentum then look for a rally into the minor pivot at $99.23, additional resistance will come in at $102.70 to $106.33.
Bearish Scenario
A sustained move under $89.54 will indicate the presence of sellers. 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
A little more than a week ago, prices were rallying on the back of a weaker U.S. Dollar and a bright outlook for U.S. exports to Europe. Now that bullish jobs data has essentially greenlit another round of aggressive rate hikes by the Fed, the U.S. Dollar could resume its uptrend. The stronger U.S. Dollar will lead to lower foreign demand for dollar-denominated crude oil. This could put a cap on prices.
Prices could also continue to fall until traders find value. The first value zone is $89.54 to $82.80, followed by $76.54 to $66.74.
The tight supply situation is going to prevent a massive liquidation, but buyers aren’t going to step in unless they get their price.
The Fed rate hikes are designed to slow down the economy and hence demand for crude oil without causing a recession. Today’s jobs data suggests the Fed has a lot of room to raise rates without causing a recession. Furthermore, recent comments from Fed officials suggests the Fed may not stop until inflation reaches their mandate at 2%.
In summary, we’re looking for gains to be capped because the Fed rate hikes should pressure demand. However, we’re also looking for a price floor because supply is tight.
Once traders find value at either $89.54 - $82.80 or $76.54 to $66.74, crude should become rangebound as supply/demand forces balance out.
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I would love to see the article address the impact of releases from the SPR on builds. They are scheduled to end in October and if demand destruction hasn't occurred by then it might paint a clearer picture of whether oil markets are artificially being propped up as we head into election season.
