Strong upward momentum for oil seen amid volatile market
THE oil market entered 2023 with hopes of gaining clarity on the global economic situation, the resolution of the geopolitical crisis, and the recovery of the Chinese economy to boost demand. While fundamentals may be improving somewhat, an overall ambiguous macroeconomic backdrop still continues to subdue the commodity.
Brent crude oil, a major benchmark for oil prices worldwide, has comfortably positioned itself over the recent resistance level of US$90, currently up by 9.61 per cent year-to-date, and continues to move higher. At the time of writing on Sep 15, Brent touched its highest point this year at US$94.62 per barrel amid rising supply risks. Brent has a decent chance to gain additional momentum as it has recently settled above an important resistance level and traders stay focused on tight supplies. Overall, sentiment in the oil market has improved incredibly in 3Q 2023 but Brent still falls short of recovering to its last year’s highs. Additionally, the RSI is in the overbought territory, increasing the risk of a pullback.
According to the US Energy Information Administration’s (EIA) recent short-term oil outlook report, Brent crude oil prices are expected to average US$93 per barrel during 4Q 23, up from US$86 a barrel in August. The agency cites deficiencies in global oil inventories in the coming months as the reason for the price change. However, it also predicts that prices will ease to an average of US$87 a barrel by the second half of 2024 but remains hopeful that Opec and Russia will unwind their production cuts in 2024 which will turn the global oil deficit into a small surplus. However, this optimism alone might not provide a reliable strategy for investors.
The tug-of-war between robust demand despite concerns about US Federal Reserve’s rate projections, and producers maintaining supply constraints amid the global economic slowdown, is creating enough traction in oil prices. Saudi Arabia and Russia’s decision to extend their combined 1.7-million-barrel production cut until the end of the year is a fundamental factor driving the oil market. Currently, the overall conditions encourage a “buys on dips strategy” for oil investors.
In the largest economy in the world, US crude oil inventories increased by 3.955 million barrels last week, coinciding with the end of the summer travel season. The latest EIA report also pointed out that the refiners had maintained an extraordinarily high run rate of 93.7 per cent to meet robust domestic demand, shelling 12.9 million barrels per day, close to the record high of 13.1 million per day averaged in March 2020.
Risks in the form of persistent inflationary pressure and the ailing recovery in mainland China continue to limit oil’s upside potential. The duration of elevated Fed rates is also up for debate; the possibility of economic weakening denting the global demand for oil can’t be eliminated either. The Federal Reserve is expected to keep rates unchanged this week despite last week’s US CPI numbers projecting a higher-than-expected jump in inflation. A scenario of a rising rate doesn’t bode well for dollar-denominated oil but markets are fixated on Fed’s pause in September and are currently shrugging off the inflationary pressures over supply concerns.
To sum up, although the upward momentum for oil is strong, traders need to be cautious over the volatility in oil prices. Bear in mind that bullish patterns can quickly reverse, so it is important to always have a solid risk strategy in place. If we plot a Fibonacci regression between Brent’s high from March 2022 to its low in March 2023, the 38.2 per cent level of US$96.80 to US$97.10 per barrel becomes the next target on the upside if the market breaches the major test of risk appetite at the US$95 mark.
The writer is senior market analyst at Phillip Nova
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