At the beginning of last week, international crude oil prices experienced a series of declines, with US oil futures falling from $91.52 to $85.45 on Wednesday before bouncing back. This was the lowest price seen since February, Brent crude oil also recorded its lowest level since February, and the lowest price since before Russia invaded Ukraine. Although the decline in crude oil prices narrowed before the weekend, recovering to trade above $88. Still, there is currently no reason for the trend in oil prices to experience a sharp rise, with many pointing at lower demand as the primary reason behind the falling oil prices. As a result, many investors expect oil prices to keep consolidating at current prices or to move lower.
Since the beginning of June, US oil prices have tossed and fallen from a peak of $122 to a low of $85.99 last week. The main reason for the downtrend is that the primary economic data from various countries show that there has been a slowdown to varying degrees. As a result, the market is worried that the outlook for crude oil demand will decline further due to less economic activity. The situation is worsened by the current record-high inflation levels and the fact that central banks are committed to raising interest rates, which negatively impacts future economic growth prospects as leading industries contract.
Earlier, OPEC announced during its monthly meetings that it would increase the daily oil output from 1,200,000 barrels of crude oil to 1.3 million barrels, an additional 100,000. The increase was modest, but production in other major oil-producing countries was reported to have risen. Saudi Arabia’s crude oil exports rose in June, while production rose to a more than two-year high. Earnings from Russian energy exports are expected to grow by 38 per cent this year, mainly due to an increase in oil exports, suggesting that Russia’s crude oil supply may not be as ample as initially expected. The situation raises concerns about an oversupply of crude oil, which has contributed to the low prices and could keep prices suppressed for much longer. In addition, the US Dollar’s continuous rise has also put significant pressure on commodity prices.
Although short-term oil prices still have a sluggish momentum, some analysts believe the momentum will stabilise as oil prices remain under pressure, waiting for a catalyst to rebound. For example, the Iran nuclear negotiations have not seen significant progress, and the market generally believes that an agreement in the near term is highly unlikely. Moreover, Goldman Sachs noted that even if a deal is reached, there will be no additional crude oil supply until next year since it would be “phased in”. As a result, Iran would not restore its export oil supply until early 2023.
This week’s manufacturing and services PMI data releases from multiple countries are expected to have a short-term impact on oil prices as investors focus on demand factors and economic data, which may provide oil prices with a much-needed boost. Earlier announcements of a sharp drop in US crude oil inventories could also boost oil prices. US crude inventories fell by 7.1 million barrels in the week ended August 12, a much larger-than-expected decline as exports reached 5 million barrels of oil per day, a record high. In addition, EIA data showed an increase of 225,000 barrels of implied demand per day during the previous week, as the recent weakness in gasoline prices provided some support for demand. Another concern is the potential for a sharp rise in fuel demand in Europe during the winter. The European Union’s embargo on Russian crude oil and gas, which will take effect in December, further exposes the region to a biting fuel shortage in the winter. Given the limited capacity of other Middle Eastern oil producers to supply more sour crude oil similar to Russia’s, the supply gap will be difficult to fill unless Iran reaches a nuclear deal.
However, as we have pointed out above, an Iranian nuclear deal is nowhere in sight; hence, there is little hope for Europe to secure additional crude and natural gas supplies. Therefore, we will likely see oil prices rise amid higher demand and lower supplies as winter kicks in. At present, US crude oil prices are consolidating near their recent lows. If oil prices push above the 20-day moving average of $92 on the daily chart, it could attract more buyers who could push prices higher. If oil prices break above $92, the next key resistance is $98. In terms of support, if the previous low of $85.45 is broken, we may see oil prices hit the next support level at $81.
