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Oil Bulls Seek $90 Brent as US Summer Nears Exhaustion

Published 09/05/2023, 05:04 PM
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  • Oil prices are nearing the $90 mark, with strong momentum suggesting a potential push to break this threshold.
  • Despite the approaching fall season, Saudi Arabia, Russia, and OPEC are cutting production to keep oil prices artificially high.
  • Analysts caution that consumer and global economic resilience should not be underestimated, and a prolonged push for higher oil prices may face challenges.
  • The race is on for $90 oil. But summer, the season Americans like driving the most, is almost over and will wrap in less than three weeks when the fall season begins on Sept. 23.

    Typically, at this time of year, crude prices would retreat slightly, sometimes meaningfully, in tandem with lower demand in the world’s largest oil consumer.

    Not this time, maybe. The Arabs, who control much of the world’s oil exports, are fixated on getting to triple-digit pricing, something a barrel had not seen since August 2022, when Brent crude hovered above $105, after reaching nearly $140 in March that year after the Russian invasion of Ukraine.

    On Friday, the London-traded global benchmark for oil settled at a little below $89. New York-traded West Texas Intermediate, or WTI, the benchmark for US crude, finished slightly above $85.

    In Monday’s early trade in Asia, crude prices fell slightly. 

    Most analysts think oil longs will not back off until Brent takes out the $90 target — with just a couple of dollars left, it appears the target is more academic than anything else — and US crude gets as close as possible to that level too.

    “That there is still plenty of momentum so close to $90 a barrel may suggest we could see a strong push to break above which would represent a big shift in the market dynamic in quite a short period of time,” analysts at Oanda wrote in a note. 

    The question is, what comes after that? 

    As said earlier, with the advent of fall or autumn, US driving activity will begin to lessen, and the deceleration will heighten as the weather gradually turns colder, heading into the winter months. The chill will, of course, bring its own attendant demand for heating.

    Even so, the period between now and late October/early November, known as the ‘shoulder season’ between end-summer and advanced fall, typically sees less demand for oil and, correspondingly, lower prices for crude.

    But the Saudis and Russians, and their allies in the Organization of the Petroleum Exporting Countries, or OPEC, are planning to cut as many barrels from production and exports as necessary to defy market norms.

    While demand is usually the driver for the pricing of anything, in this case, the Saudis and their allies are using supply to overwhelm the buying component in the oil market to skew the market balance in their way.

    The idea is to create such an artificially short supply that the trade simply cannot function in a normal way.

    Key to this is the one-million-barrels-per day in additional cuts, on top of other existing production rationing, that the Saudis have been carrying out since July.

    Now into its third month in September, almost everyone in the market expects the Saudis to take this into October as well — and possibly into the end of the year and maybe beyond in their obsession to get triple-digit pricing.

    Joining the Saudis in this quest appear to be the Russians, who, just a few months, seemed content in selling oil at any price to fund their war machinery against Ukraine. 

    While the oil trade awaited news last week from Riyadh on the extension of the one-million-barrel-per-day cut into October, it was Russian Deputy Prime Minister Alexander Novak instead who told the media that OPEC+ will announce more “market actions” — a veiled threat that the Saudis will extend cuts for a fourth straight and probably the Russians will join too this time.

    “Everyone’s looking at the flat price of crude oil and saying gasoline and diesel prices will also go to the moon,” said John Kilduff, founding partner of New York-based energy hedge fund Again Capital. “But fuel uptake for this summer is still very much down to earth, higher than a year ago, yes, but still below pre-pandemic levels.” 

    “You have an odd situation where the Saudis are trying to create a supply situation even lower than the seasonal lows in demand,” Kilduff continued. “All I’ll say is don’t test the mettle of consumers and the global economy because when either collapses, your dream of higher and higher prices will also go with that.”  

    Technical charts for WTI also indicate that it may be reaching correction levels soon, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. 

    The US crude benchmark finished up 7.2% last week after a combined 4% drop over two prior weeks as the economy in oil top importer China sputtered. Prior to that, WTI gained 20% over seven weeks. 

    Brent, meanwhile, rose 4.8% last week after a combined 2.3% drop over two prior weeks. Before that, the global crude benchmark rose for seven weeks in a row, gaining a total of 18%.

    Despite the surge in crude markets, fuel prices fell last week, with heating oil, the proxy for diesel, down 6% and gasoline futures tumbling  9%. 

    Poor weekly data for fuel could be the reason for this, with the US government citing a distillates build of 1.235M, against a forecast of 0.189M and a previous weekly gain of 0.945M.

    For gasoline stockpiles, the decline was well below expectations, with a drop of 0.214M versus the forecast slide of 0.933M and the previous week’s pull of 1.467M.

    DIxit from SKCharting said that technically, WTI could still edge towards the monthly middle Bollinger Band $86.80 and open its way towards the November 2022 high of $93.70.

    But a more likely scenario is a temporary pullback towards the horizontal support zone of $84.90 - $84.40, he said.

    This could even extend towards $82.40 and the Daily Middle Bollinger Band of $81.40 that would do well for WTI, Dixit said. 

    “Momentum has reached a critical inflection point with limited room for further upside, which will have to retest the monthly middle Bollinger Band $86.80 as target,” said Dixit. “This is very likely to witness selling pressure as short term price action reaches overbought conditions.”

    Cooling U.S. economic activity ramped up hopes that the Federal Reserve will have limited headroom to keep raising interest rates, easing some concerns that high rates will crimp crude demand this year. 

    But the dollar remained strong, hovering near three-month highs on Tuesday as markets awaited a string of Fed speakers this week. While the bank is widely expected to keep rates on hold in September, it is also expected to maintain rates at over 20-year highs for longer. 

    In China, government and private surveys offered mixed signals on manufacturing activity as the world’s largest oil consumer struggles to shore up a post-COVID economic recovery.

    Those long oil are, instead, hoping that Beijing will release more stimulus measures in the coming weeks to further support growth. Focus this week is also on Chinese trade data to gauge just how well crude demand is holding up in the country.

    Some are looking at the start of the North Atlantic hurricane season as one factor that could be supportive for oil, especially if there are serious disruptions in production and damage to oil installations in the US Gulf Coast of Mexico.

    But history has been on the kinder side of late to America where hurricane damage is concerned.

    ***

    Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.

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