FIS: Crude Oil Market Overview
Last week was the first time Brent crude fell to $88/bbl since the Russia-Ukraine war started.
A US Strategic Petroleum Reserve (SPR) draw may have influenced the continued reduction in oil prices. Reuters reported that U.S. emergency crude oil stocks fell 8.4 million bbls last week to 434.1 million bbls, their lowest since October 1984, according to U.S. Department of Energy (DOE) data. This was also one of the largest draws since May. This is part of President Joe Biden’s plan to release 1 million b/d over six months to ease oil prices in the US due to end in October.
It was reported that the White House would not consider more releases from SPR after October. This could be because oil futures continue to drop. It will be a chess game as their decision will likely be influenced by whether OPEC cuts more production.
An increase in oil supply from Iran continues to loom, but the revival of the West’s nuclear deal with Iran has not progressed recently. There have been 16 months of negotiations between the US and Iran, with a final offer from the European Union last month. Iran responded to this with what the EU called a step backwards. It is now unclear how the West will respond. President Joe Biden is more hesitant to act on the deal now as the midterm elections get closer.
The resolution seems unlikely as France, Germany, and the UK issued a joint statement saying the Iranian demand that the IAEA probe is shut down raises doubts as to Iran’s intentions and commitment, Aljazeera reported.
OPEC continue to forecast that global oil demand will grow despite inflation, as economies seem to perform better than expected, Reuters reported. OPEC projects oil demand of 102.07 million b/d in 2023. This is supported by the gas-to-oil substitution for power generation and industrial consumption. The Russia-Ukraine war and sanctions on Russia have limited gas supply and raised prices.
The market expects Chinese Covid-19 restrictions to ease and boost the country’s oil demand. Data has yet to show whether this will happen. Covid-restrictions hit China’s Mid-Autumn Festival numbers. Reuters said the number of tourists fell 16.7% from a year earlier, and tourism earnings slumped 22.8%.
Technical view of the Crude Oil Market:
November Futures – an OPEC production cut didn’t have the effect we were expecting last week, with the futures only trading to a high of USD 96.99 before selling down to new lows.
We seem to have witnessed cycle completion, having already seen a 5-wave pattern lower to USD 91.51, followed by a move up to USD 105.48. From an Elliott wave perspective, a downside move below USD 91.51 would suggest we have started a new bear cycle - a wave 3 of a larger cycle.
Since trading to a low of USD 87.24, we saw the futures trade up to USD 94.89 on 12 September on the back of a weaker US dollar.
Upside moves that fail at or below USD 99.28 will leave the futures vulnerable to further tests to the downside. Above this level, the wave cycle has a neutral bias, and only above USD 105.48 will the wave cycle have failed.
If we suspect we have now moved into a larger cycle, then we have a potential downside target of USD 91.71.
The futures is technically bearish based on the lower low/wave cycle. Upside moves are considered a countertrend at this point.
Written by Mopani Mkandawire and Edward Hutton, Edited by Chris Hudson (https://freightinvestorservices.com/fis-live/).
