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Oil Bulls Seek $90 Brent as US Summer Nears Exhaustion

By Investing.com (Barani Krishnan)CommoditiesSep 05, 2023 05:04AM ET
www.investing.com/analysis/oil-bulls-seek-90-brent-as-us-summer-nears-exhaustion-200641562
Oil Bulls Seek $90 Brent as US Summer Nears Exhaustion
By Investing.com (Barani Krishnan)   |  Sep 05, 2023 05:04AM ET
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  • Oil prices are nearing the $90 mark, with strong momentum suggesting a potential push to break this threshold.
  • Despite the approaching fall season, Saudi Arabia, Russia, and OPEC are cutting production to keep oil prices artificially high.
  • Analysts caution that consumer and global economic resilience should not be underestimated, and a prolonged push for higher oil prices may face challenges.

The race is on for $90 oil. But summer, the season Americans like driving the most, is almost over and will wrap in less than three weeks when the fall season begins on Sept. 23.

Typically, at this time of year, crude prices would retreat slightly, sometimes meaningfully, in tandem with lower demand in the world’s largest oil consumer.

Not this time, maybe. The Arabs, who control much of the world’s oil exports, are fixated on getting to triple-digit pricing, something a barrel had not seen since August 2022, when Brent crude hovered above $105, after reaching nearly $140 in March that year after the Russian invasion of Ukraine.

On Friday, the London-traded global benchmark for oil settled at a little below $89. New York-traded West Texas Intermediate, or WTI, the benchmark for US crude, finished slightly above $85.

In Monday’s early trade in Asia, crude prices fell slightly. 

Most analysts think oil longs will not back off until Brent takes out the $90 target — with just a couple of dollars left, it appears the target is more academic than anything else — and US crude gets as close as possible to that level too.

“That there is still plenty of momentum so close to $90 a barrel may suggest we could see a strong push to break above which would represent a big shift in the market dynamic in quite a short period of time,” analysts at Oanda wrote in a note. 

The question is, what comes after that? 

As said earlier, with the advent of fall or autumn, US driving activity will begin to lessen, and the deceleration will heighten as the weather gradually turns colder, heading into the winter months. The chill will, of course, bring its own attendant demand for heating.

Even so, the period between now and late October/early November, known as the ‘shoulder season’ between end-summer and advanced fall, typically sees less demand for oil and, correspondingly, lower prices for crude.

But the Saudis and Russians, and their allies in the Organization of the Petroleum Exporting Countries, or OPEC, are planning to cut as many barrels from production and exports as necessary to defy market norms.

While demand is usually the driver for the pricing of anything, in this case, the Saudis and their allies are using supply to overwhelm the buying component in the oil market to skew the market balance in their way.

The idea is to create such an artificially short supply that the trade simply cannot function in a normal way.

Key to this is the one-million-barrels-per day in additional cuts, on top of other existing production rationing, that the Saudis have been carrying out since July.

Now into its third month in September, almost everyone in the market expects the Saudis to take this into October as well — and possibly into the end of the year and maybe beyond in their obsession to get triple-digit pricing.

Joining the Saudis in this quest appear to be the Russians, who, just a few months, seemed content in selling oil at any price to fund their war machinery against Ukraine. 

While the oil trade awaited news last week from Riyadh on the extension of the one-million-barrel-per-day cut into October, it was Russian Deputy Prime Minister Alexander Novak instead who told the media that OPEC+ will announce more “market actions” — a veiled threat that the Saudis will extend cuts for a fourth straight and probably the Russians will join too this time.

“Everyone’s looking at the flat price of crude oil and saying gasoline and diesel prices will also go to the moon,” said John Kilduff, founding partner of New York-based energy hedge fund Again Capital. “But fuel uptake for this summer is still very much down to earth, higher than a year ago, yes, but still below pre-pandemic levels.” 

“You have an odd situation where the Saudis are trying to create a supply situation even lower than the seasonal lows in demand,” Kilduff continued. “All I’ll say is don’t test the mettle of consumers and the global economy because when either collapses, your dream of higher and higher prices will also go with that.”  

Technical charts for WTI also indicate that it may be reaching correction levels soon, said Sunil Kumar Dixit, chief technical strategist at SKCharting.com. 

The US crude benchmark finished up 7.2% last week after a combined 4% drop over two prior weeks as the economy in oil top importer China sputtered. Prior to that, WTI gained 20% over seven weeks. 

Brent, meanwhile, rose 4.8% last week after a combined 2.3% drop over two prior weeks. Before that, the global crude benchmark rose for seven weeks in a row, gaining a total of 18%.

Despite the surge in crude markets, fuel prices fell last week, with heating oil, the proxy for diesel, down 6% and gasoline futures tumbling  9%. 

Poor weekly data for fuel could be the reason for this, with the US government citing a distillates build of 1.235M, against a forecast of 0.189M and a previous weekly gain of 0.945M.

For gasoline stockpiles, the decline was well below expectations, with a drop of 0.214M versus the forecast slide of 0.933M and the previous week’s pull of 1.467M.

DIxit from SKCharting said that technically, WTI could still edge towards the monthly middle Bollinger Band $86.80 and open its way towards the November 2022 high of $93.70.

But a more likely scenario is a temporary pullback towards the horizontal support zone of $84.90 - $84.40, he said.

This could even extend towards $82.40 and the Daily Middle Bollinger Band of $81.40 that would do well for WTI, Dixit said. 

“Momentum has reached a critical inflection point with limited room for further upside, which will have to retest the monthly middle Bollinger Band $86.80 as target,” said Dixit. “This is very likely to witness selling pressure as short term price action reaches overbought conditions.”

Cooling U.S. economic activity ramped up hopes that the Federal Reserve will have limited headroom to keep raising interest rates, easing some concerns that high rates will crimp crude demand this year. 

But the dollar remained strong, hovering near three-month highs on Tuesday as markets awaited a string of Fed speakers this week. While the bank is widely expected to keep rates on hold in September, it is also expected to maintain rates at over 20-year highs for longer. 

In China, government and private surveys offered mixed signals on manufacturing activity as the world’s largest oil consumer struggles to shore up a post-COVID economic recovery.

Those long oil are, instead, hoping that Beijing will release more stimulus measures in the coming weeks to further support growth. Focus this week is also on Chinese trade data to gauge just how well crude demand is holding up in the country.

Some are looking at the start of the North Atlantic hurricane season as one factor that could be supportive for oil, especially if there are serious disruptions in production and damage to oil installations in the US Gulf Coast of Mexico.

But history has been on the kinder side of late to America where hurricane damage is concerned.

***

Disclaimer: The aim of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.

Oil Bulls Seek $90 Brent as US Summer Nears Exhaustion
 

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Oil Bulls Seek $90 Brent as US Summer Nears Exhaustion

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Comments (14)
Teena Marie
Teena Marie Sep 07, 2023 4:02AM ET
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Production cuts over the years have often occurred in September when summer travel ends.
Lin Yingjun
Lin Yingjun Sep 05, 2023 1:22PM ET
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Nice article! Thanks for input. I sold UCO and had $5/share gains. Waiting to trigger SCO. Russia needs money, they will let crude floods the market.
Richie Berg
Richie Berg Sep 05, 2023 12:28PM ET
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Biden: We're weaponizing the US$ OPEC+: We're weaponizing oil Wonder who wins?
EL LA
EL LA Sep 05, 2023 12:05PM ET
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Lockstep monster:  oil vs USD chart.
Sep 05, 2023 11:20AM ET
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american's drive define oil consumption? and WINTER HEATING is ok? manufacturing is ok?. omg
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Mike Brarey
Mike Brarey Sep 05, 2023 11:20AM ET
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which is extremely common in this geopolitical environment
Barani Krishnan
Barani Krishnan Sep 05, 2023 11:20AM ET
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Mike Brarey  You're totally disregarding consumer power here. The right to consume less and resultant economic reaction to that. The biggest BS that the academic world gave us is the so-called inelasticity of demand to pricing. Try $5 gas and see what happens :)
Barani Krishnan
Barani Krishnan Sep 05, 2023 11:20AM ET
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Mike Brarey  You're totally disregarding consumer power here. The right to consume less and resultant economic reaction to that.
Barani Krishnan
Barani Krishnan Sep 05, 2023 11:20AM ET
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Mike Brarey  The biggest b(s) that the academic world gave us is the so-called inelasticity of demand to pricing. Try $5 gas at the pump and see what happens :)
Chris Gonzales
Chris Gonzales Sep 05, 2023 11:20AM ET
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Barani Krishnan already is $5
Chris Wells
Chris1125 Sep 05, 2023 11:20AM ET
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Bidenomics at work
Invest Right
Invest Right Sep 05, 2023 11:08AM ET
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Barani, oil is now in a bull market because of structural under-supply and nonsensical ESG policies. You'd do well to acknowledge this reality rather than fight it.
Barani Krishnan
Barani Krishnan Sep 05, 2023 11:08AM ET
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Reiterating what I told someone else below: Every positive news, barring storm threat, has been priced in. What more are the Saudis going to do? Scare the market each month with more cuts? And you think demand will stay at pre-pandemic highs to support this fantasy of theirs? It's laughable really when you long-oil constituency try to de-construct what the other side has already figured out. By the way, that technical call by Sunil Kumar Dixit went to print before this latest indiscretion of the Saudis/Russians -- which granted needed some market premium on announcement. We'll see how long this premium stays in place, especially when every bit of upside has already been priced in.
Invest Right
Invest Right Sep 05, 2023 11:08AM ET
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You were saying similar things when oil was around $70. As an analyst, follow the market's lead rather than think you're smarter than it.
Mike Brarey
Mike Brarey Sep 05, 2023 11:08AM ET
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you are just going to need the hint of instability in the middle east to spike oil supply uncertainly and prices
Mike Brarey
Mike Brarey Sep 05, 2023 11:08AM ET
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the idea that every possible bad news is prices in is nonsense of course
Barani Krishnan
Barani Krishnan Sep 05, 2023 11:08AM ET
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Invest Right  I am following the market and therefore I'm asking, what more surprises is OPEC going to throw at you other than threats of more cuts, geo instability etc? And when that happens, how do you think the global economy will perform? hunky dory?  Do not forget that the economy is as much a function of consumer sentiment as it is need.
SEREY HON
SEREY HON Sep 05, 2023 10:21AM ET
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hello admin
Royce Murph
Royce Murph Sep 05, 2023 9:23AM ET
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Shaking my head. How in the heck do you even believe your BS.
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Royce Murph
Royce Murph Sep 05, 2023 9:23AM ET
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Barani Krishnan “Yet here we are with global demand at an all-time high of 103m barrels a day in June driven by what the International Energy Agency said was better than expected economic growth in OECD”. What BS answer do you have for this
Royce Murph
Royce Murph Sep 05, 2023 9:23AM ET
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Barani Krishnan “Yet here we are with global demand at an all-time high of 103m barrels a day in June driven by what the International Energy Agency said was better than expected economic growth”
Lio Gutierrez
Lio Gutierrez Sep 05, 2023 9:23AM ET
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I disagree not all bullish news have been priced in global oil inventories are actually lower now compared to the pre spr releaseJune 2022 lows so oil prices are still mispriced they have room to run into the 90s up to 100 in my opinion and yes the Saudi's can threaten to cut even more.
Barani Krishnan
Barani Krishnan Sep 05, 2023 9:23AM ET
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Lio Gutierrez  I have seen this game again and again and again since I started covering the energy sector in 1988 -- 35 years ago. It's the same thing every time -- OPEC gets done in by its greed. Ali Naimi was the only Saudi oil minister who had an idea of what real "market balance" was (no, it's not balance as defined by the present c(lowns) to screw the consumers to kingdom come but actually keeping prices at an affordable level so there can be mutual growth).
Barani Krishnan
Barani Krishnan Sep 05, 2023 9:23AM ET
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Royce Murph  And what prices did we have for crude in June? Don't look it up, I'll tell you: the low for Brent was $71.57, just a little higher than May's 18-month trough of $71.28. You've inadvertently proven what I've been trying to tell both you and Lio: that lower oil prices encourage economic growth and energy consumption versus pricey oil, which only benefits producers.
NK Dole
NK Dole Sep 05, 2023 9:06AM ET
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Not sure what is going on, but I opened my chart and the price of oil went up over $1.50/bbl in about 4 minutes at 8:00 am central.
Barani Krishnan
Barani Krishnan Sep 05, 2023 9:06AM ET
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Nick, that technical call by Sunil Kumar Dixit went to print before this latest indiscretion of the Saudis/Russians -- which granted needed some market premium on announcement. We'll see how long this premium stays in place, especially when every bit of upside has already been priced in. On the flip side, the Saudis are hurting Chinese economic recovery as well with this sort of pricing. I've covered this game since 1988 -- for the past 35 years now. I've seen every market boom and bust since the days when Hisham Nazer was Saudi oil minister, before Ali Naimi's 20 years and Khalid Falih's time ahead of this half brother of MbS. This too will come to pass, trust me.
 
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