The mood in the oil market swung dramatically last week. On Monday to Wednesday the price surged, rallying 7.7% in just three days and closing above its 200 day moving average. On Thursday that rally then faded, and was followed by marked weakness on Friday (with Brent down -3.9% on the day, FIG 1). For the week, oil prices closed up 1.7%.
Some reports suggest that Friday’s weakness was in anticipation of yesterday’s OPEC+ decision (to boost supply by 547,000 bpd in September). That decision, though, wasn’t a surprise (and is broadly consistent with this months’ increase*). In other words, as expected, OPEC+ continued with its plan to ramp-up supply (i.e. reducing its spare production capacity back to more ‘normal’ levels).
The challenge for the oil market, of course, is that OPEC+ is continuing to ‘normalise’ output into a slowing US economy. That was illustrated by last week’s US macro data, specifically the nonfarm payrolls and ISM manufacturing data. Job growth was weaker than expected in July (and was revised lower for the prior two months), while manufacturing activity remained soft (consistent with the weakness in other interest rate sensitive, cyclical parts of the economy).
Added to that, a number of Longview’s medium term oil models were generating SELL signals by the middle of last week. That includes, for example, our medium term technical scoring system for oil, which aggregates signals from a range of price based indicators (and is shown in FIG 2). As such, and while sentiment and positioning models are currently somewhat mixed, the oil market remains vulnerable to the downside from a ‘fundamental’ and a ‘technical’ perspective.
FIG 1: Brent oil price futures candlestick, shown with 50 & 200 day moving averages (US$/barrel)
*Since April, OPEC+ has been unwinding its 2023 voluntary cuts of 2.2 million bpd, starting with an extra 138,000 bpd in April, then stepping up to 411,000 bpd for May, June, and July. Current plans are for a 548,000 bpd increase this month (August), and a 547,000 bpd increase for September (which includes a 300k bpd capacity allowance for the UAE).
FIG 2: Medium term BRENT oil technical scoring system vs. oil price (US$/barrel)
