11 August, 2024
Will Oil Rebound From Lows?
The recent weeks have been tough for oil bulls. WTI oil, which traded near the $84.00 level at the beginning of July, dropped below $74.00. Market action was also disappointing for Brent oil bulls, which had to watch prices drop from $88.00 to the current $76.00 level.
Initially, the pullback was triggered by disappointing economic data from China. The country’s economy is not growing as fast as markets have expected, so traders fear its oil demand will also be weaker than expected.
In recent days, attention turned to the U.S. The job market data was weaker than expected, and everyone has started talking about the slowdown of the U.S. economy. Ultimately, equity markets had to endure a rough pullback, although it was mostly driven by high valuations of tech stocks rather than serious economic problems. Not surprisingly, the strong sell-off in the equity markets hurt commodity markets.
It should be noted that OPEC+ still plans to start increasing production in October. If markets stay where they are now, the group will likely change its mind, providing additional support to oil prices.
Meanwhile, the Fed will start cutting rates in September. The only question is whether Fed starts with a 25 bps cut or goes full speed with a 50 bps cut. The second option could provide a major boost to oil markets ahead of winter.
At this point, it looks like the recent pullback in the oil markets was mostly driven by fears rather than fundamentals. Saudi Arabia has recently raised September crude prices for Asian customers, despite recession worries. Analysts would point out that the hike was smaller than expected, but any hike is a significant development at a time when the market is under strong pressure.
From the technical point of view, oil markets have pulled back towards the low end of their yearly range. To move lower, oil would need additional negative catalysts that have not been already priced in by the market. At this point, a rebound from current levels looks like a more probable scenario.
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