Crude oil: Make or break quarter coming up
Crude oil continues to trade sideways near a cycle low within a seven-dollar wide range between $71.50 and $78.50, as traders continued to gauge the impact of Saudi Arabia’s decision to go it alone to support prices at the recent OPEC+ meeting. However, once again, the lower end of the aforementioned range is being challenged after central banks, through their continued hiking of rates, raised concerns about the economic outlook.
Earlier this month, the International Energy Agency (IEA) joined OPEC in delivering an upbeat assessment of the short term demand outlook. In their monthly ‘Oil Market Reports’ for June, both OPEC and the IEA raised their outlook for 2023 global demand. Both forecasters are looking for some emerging tightness in the coming months amid OPEC+ production cuts, but with almost half this year’s demand growth expected to occur during the coming quarter, some room for disappointment exists, potentially preventing prices from going higher in the short term.
With this in mind, the coming quarter could potentially make or break the crude oil market as, dependent on whether OPEC and IEA is correct or whether - as the Saudi unilateral production cut earlier this month tried to preempt, we could see economic activity slow to an extent prices suffer further declines. In such a situation it will be interesting to see how it is being handled by OPEC and not least, Saudi Arabia. Having already cut production, thereby giving up market share to support the price, the Kingdom is likely to apply intense pressure on other producers to make additional cuts.
At Saxo, however, we believe a US recession will be avoided and that China will step up its efforts to support the economy, but whether it will be enough to support higher prices through a tightening market remains to be seen. For now, we are left with a market where macro-focused funds once again prefer to trade the oil market from a short perspective as a hedge against further economic weakness.
In the short term, we are watching OPEC’s focus on supply management, which for now has kept the market supported above $70, while an upside break seems equally unlikely if the focus remains on a weakening economic outlook. From a technical standpoint, the $80 area in Brent will offer a great deal of resistance and funds positioned for additional weakness are unlikely to change their negative price view until we see the return of an 8-handle.