Commodities

Oil trades in a range, balancing trade worries with supply outages – Commodity News

• A- A A+

The energy market has been caught between two conflicting narratives in recent weeks, with expectations for diminished supply from Iran supporting oil prices, but worries around global trade and emerging markets (EM) weighing on expectations for demand. Accordingly, crude has moved mostly sideways, albeit in a volatile manner. In the near-term, prices may be most sensitive to how trade tensions play out, with supply considerations gaining more traction further out.

Oil prices have taken a modest hit in recent days, as concerns relating to a looming escalation in the Sino-American trade standoff and a rapid deterioration in emerging market economies are clouding the outlook for global economic growth and hence, for future crude demand. On the other hand, the steady decrease in oil production from the likes of Iran and Venezuela, as well as the transportation bottlenecks in the US Permian basin are painting a worrisome picture for supply, keeping an implicit floor under prices.

At the beginning of the summer, the overwhelming narrative in the energy market was that upcoming US sanctions on Iran’s crude exports would lead to a shortage in supply, thereby pushing prices higher. That transpired only partially, because even though the US did move forward with the sanctions, major producers like Saudi Arabia and Russia pledged to raise their own production to fill part of the shortage left by Iran. Indeed, both WTI and Brent have moved largely sideways since late-May, when rumors for such an output boost began to surface, with both benchmarks trading in a range of roughly $10 – albeit with rather large and sudden swings. Of course, trade-war concerns have also played a large role in keeping this range in place, capping any breaks to the upside.

Moving forward, the most crucial determinant for prices in the near-term may be how the US-China trade dispute plays out and specifically, whether both sides will exchange another salvo of tariffs soon, perhaps as early as later today. Such an escalation – which would almost certainly come with threats for even further tariffs down the road – could take a toll on broader market sentiment, weighing on risk-sensitive commodities like oil via expectations for slower demand growth. On the contrary, should the two sides shy away from proceeding with the levies they announced, then prices could see a relief bounce. That said, this appears like a low-probability scenario at present.

On a longer-term timeframe, supply considerations are likely to become a dominant force again. Prices may be particularly sensitive to how much production is ultimately lost from Iran and Venezuela, as well as how much the other OPEC members raise their own supply to counterbalance such losses. Last but not least, the other key variable will be how the situation in emerging markets develops. Argentina, Turkey, Indonesia, India, Brazil, and many other developing economies have seen their respective currencies plunge in recent months amid capital outflows. With oil being priced in dollars and most of these nations being net-importers of crude, there are clear downside risks for global demand as EM consumers will most probably see fuel prices surge at the pump soon.

All in all, with so many fundamental variables and moving parts that could influence oil prices, finding other means of determining sentiment shifts in a market can be particularly valuable. Specifically, technical levels and breaks in an instrument oftentimes provide a solid hint as to how traders’ mentality may be changing. Taking WTI as an example, prices are currently trading in a sideways range between $64.40 and $75.27 from mid-June onwards, and a break on either side could signal a change in the liquid’s broader outlook. To elaborate, a clear break below $64.40 would suggest increased pessimism – perhaps due to demand concerns or too much supply hitting the market – and may be a signal for further declines. Vice-versa, a close above $75.27 could pave the way for more advances. Until either of these occurs, the medium-term outlook remains neutral.

Within this range, should the latest pullback in prices continue, immediate support may be found near the $68.40 hurdle, which halted the decline on September 5. A downside break could open the way for the $66.30 zone, marked by the lows of August 8, with even steeper declines bringing into focus the lower bound of the aforementioned range at $64.40.

On the upside, initial resistance to advances may come around $71.40, the high of September 4. Even higher, the inside swing low of July 5 at $72.50 may come into play. If buyers manage to pierce above it, further bullish extensions could stall near the upper bound of the range, at $75.27.