Market News
The rally in oil futures is set for a crucial test
Oil futures have rallied 22% in just over a month, driven by tight supply and improving demand fundamentals. With key resistance at $83.53 approaching, the rally faces critical tests, including potential underwhelming Chinese stimulus and uncertainty from Fitch’s US credit downgrade.
The Rally in Oil Futures is Set for a Crucial Test
Supply and Demand Fundamentals are Driving Oil Higher
Since the pandemic, it’s rare to see oil fundamentals align with bullish moves. Currently, traders are assessing restricted supply alongside improving demand, both of which support higher prices. OPEC+ has extended its supply cuts into 2024, with Saudi Arabia pledging an additional cut of 1 million barrels per day (bpd) in August, likely extending into September. Meanwhile, Russian supplies have decreased by 500,000 bpd, and other OPEC members like Nigeria and Libya face production challenges, pushing OPEC supply to its lowest since September 2021.
On the demand side, US economic resilience bolsters the outlook. The Federal Reserve no longer anticipates a recession, inflation is falling, and oil demand is improving, as evidenced by record-low inventories reported by the American Petroleum Institute. China’s potential economic stimulus adds further demand optimism.
Technicals Also Look Positive
The rally has pushed oil futures through $73.70/$75.06 resistance, which now acts as support. A test of critical resistance at $82.65/$83.53 is underway. Breaking above $83.53 would shift the medium- to long-term outlook, ending an eight-month trading range between $63.65 and $83.53.
A breakout could target levels around $97, with resistance at the October/November highs near $93.75. Momentum indicators like the relative strength index (RSI) are reinforcing the rally, with readings around 70 reflecting strong trend momentum rather than overbought conditions.
The Caveats That Could Scupper the Oil Rally
Despite the positive outlook, several factors could hinder the rally:
• Saudi Arabia’s Production Decisions: If Saudi Arabia does not extend its additional 1m bpd cuts, it could trigger profit-taking.
• Underwhelming Chinese Stimulus: Markets anticipate robust measures from China to boost consumption and production. A less ambitious approach could weigh on risk assets, including oil.
• Reaction to Fitch’s US Credit Downgrade: While markets have largely shrugged off Fitch’s downgrade to AA+, its effects could slowly materialize, potentially dragging on risk-sensitive assets like oil.
The response to $83.53 resistance will be critical in determining whether the bulls maintain control for a breakout. The signs remain positive, but caution is warranted as markets navigate these potential headwinds.
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