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CRUDE OIL ANALYSIS AND TALKING POINTS

  • US crude hit its highest point for over a month
  • Supply is on market minds as production cuts look set to continue
  • Inventory levels also weigh on traders’ minds

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Crude oil benchmark prices hit their highest points in more than a year on Thursday as the market worried about the likely effects of ongoing production cuts on a global economy tentatively struggling out of its latest inflationary shock.

The United States’ West Texas Intermediate bellwether made a short foray above $95 for the first time since last August, as international market Brent crude topped $97 in London. Cleary the specter of $100 oil stalks this market again and, while its significance is essentially psychological, it’s still going to be unwelcome for governments, businesses and consumers who’ve been hoping for some respite from higher consumer prices.

The Organization of Petroleum Exporting Countries will meet once again on October 4 to discuss planned production cuts. Current reductions from the group, along with extra, voluntary cuts from key producers Saudi Arabia and Russia, are set to take 1.3 million barrels a day out of the market until at least the end of this year.

In the meantime, the market has been given a graphic illustration of supply tightness by a report showing that stockpiles at a key US storage hub were are their lowest since last July. Cushing, Oklahoma is the delivery point for crude futures contracts and inventory there has been seriously reduced by stronger exports and increased refining.

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Will Higher Interest Rates Sap Oil Demand?

Of course, much of oil’s current price strength rests on the premise that major economies will continue the post-Covid recovery so cruelly derailed by inflation. And indeed there are signs that higher interest rates are taking effect and that broad price measures have begun to decelerate.

However, investors are getting used to the idea that borrowing costs will remain elevated for longer. This will tend to curb economic activity, indeed it’s intended to. It will also put uncomfortable focus on debt levels. Those in China’s property sectors are perhaps the most acute right now, but it’s hardly alone in the global heavy-borrowers club. In any case, higher rates seem likely to restrict crude demand but, for now, the market remains squarely focused on supply.

There’s not much oil-market-specific data to come over the remainder of this week, but the market will look to various speakers from the United States Federal Reserve, including Chair Jerome Powell, along with important inflation numbers out of the world’s largest economy which are due from the Personal Consumption and Expenditures series.

US Crude Oil Technical Analysis

Chart Compiled Using TradingView

Prices have finally broken out of the broad trading band they’d been inclined to quickly trade back into since November last year. The top of that band was April 12’s peak of $83.50, broken through at last on September 1. Previously prices had spent no significant tome outside the band since late 2022, but now it has been left far behind thanks to a strong run of gains since late August.

Now bulls’ focus will be on resistance at $97.82, the intraday high of August 31 last year, ahead of that psychological $100/barrel point.

However, after such a strong run higher, some consolidation seems likely, even if it turns out to be a mere rest-stop on the road to more gains. Reversals will likely find initial support in the $92.30 region, which is where prices peaked on September 18, with props below that around the $88 level, where they bottomed out this week. Durable slides below that point will put focus on ascending channel support all the way down at $84.43, but that is a long way under the current market and a near-term test of this looks unlikely.

IG’s own sentiment indicators suggest that there could be more rises to come, with some more bearish capitulation highly possible.

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–By David Cottle for DailyFX



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