August was a turbulent month for oil prices as conflicting themes caused the commodity to appreciate and depreciate on alternate weeks.
Despite bulls dominating the scene last week, both Brent and WTI Crude have posted their first monthly loss since March. Persistent worries over the Delta variant may spell trouble for oil as September kicks off while widespread flooding from Hurricane Ida could keep bears in the vicinity. With these negative themes stacked against oil and clouding the demand outlook, all eyes will be on the highly anticipated OPEC+ meeting on Wednesday afternoon.
Will OPEC+ Stick to Planned Output Hike?
Markets widely expect the cartel to maintain its current plan to increase production by 400,000 barrels per day despite pressure from the United States to pump more.
The question is whether expectations match or differ from reality?
Given the ongoing developments revolving around Covid-19, the cartel may reiterate that the variant poses a particular risk and may tweak production hikes accordingly. This could be in the form of reducing or halting the 400,000 bpd increases if the demand outlook starts to look unfavourable.
On the flip side, the positive vaccine-related developments across the globe have boosted optimism over a pickup in fuel demand. Looking beyond the risk associated with the Delta menace, other factors could fuel the demand recovery – allowing OPEC+ to stick with its production revival plan until the end of December 2022.
Demand outlook set to improve?
It was only a few weeks ago that the International Energy Agency (IEA) cut its forecast for global oil demand for the rest of 2021 due to the Delta variant. Interestingly, OPEC stuck to its prediction of a strong recovery in world oil demand this year and further growth next year.
OPEC could be on the money, especially when factoring in the stalled prospects of renewed Iranian exports, ongoing government stimulus, and improvement in gasoline demand as road and airline travel rebound. It does not end here. Demand is reportedly improving in the world’s second-largest oil consumer with traffic on China’s busy streets recovering as lockdown restrictions ease.
Let’s not forget about the US jobs report
The NFP report is likely to be the biggest market-moving event of the week, especially after Federal Reserve Chair Jerome Powel offered no concrete taper signals at Jackson Hole last Friday.
Investors will closely scrutinize the jobs report for fresh clues to when the Federal Reserve will begin asset tapering. A strong jobs report may boost sentiment towards the US economy and fuel taper bets consequently propelling the dollar higher. As the value of the dollar rises, the prices of both Brent and WTI crude fall. Alternatively, a disappointing jobs report could cool taper talk bets, essentially weakening the dollar – pushing oil prices higher.
Brent & Crude remain in bearish channel
Taking a look at the technical picture, Brent crude remains in a bearish channel on the daily charts. Despite the sharp rebound witnessed last week, the commodity concluded August roughly 4% lower. The recent candlesticks on the daily charts suggest that bulls could be exhausted with sustained weakness below $73 triggering a decline back towards $70.30 – a level where the 100-day Simple Moving Average resides. A break below this point could see Brent sink towards $67.46, $67 and $64.60, respectively. Alternatively, a solid daily close above $73 may pave a path towards $75 and potentially higher.
We see a similar story on WTI Crude trading within a bearish channel on the daily charts. Resistance can be found at around $69.50 with the 50-day Simple Moving Average just above this level. A strong breakout and daily close beyond $69.50 could encourage a move towards $72 and $73.50, respectively. Should $69.50 prove to be reliable resistance, a decline towards $67, $65, and $61.50 could be on the cards.
Ultimately, where oil prices conclude this week is likely to be influenced by the OPEC+ meeting and NFP report.
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Written by Lukman Otunuga, Senior Research Analyst at FXTM.