Oil Traders, Pick Your Poison: $70 Or $90 Next For U.S. Crude?

New York-traded West Texas Intermediate crude plunged 7.5% last week, losing its most since the final week of July.

For September, thus far, WTI has given back about 12%—its most since November, when it lost 21%.

For the third quarter, bulls exposed to the US crude benchmark are vulnerable to a 25% takedown—the most in a quarter since 2020.

Probably, says Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

According to Dixit, more selling is likely in WTI before September ends this Friday as bears attempt to break last week’s $78+ low with their next bearish target, predicated on the 200-month Simple Moving Average (SMA) of $72.35. Adding:

“Four months of bearish oil trends dig its heels deeper as the monthly middle Bollinger Band of $82.20 is broken and WTI drops to $78.14, which is a close shave with the 100-week SMA of $77.50.” 

WTI’s Relative Strength Indicator and stochastics readings across the daily, weekly and monthly charts were all in negative formation, Dixit added.

Moving Average Convergence Divergence (MACD) on the monthly chart has also started negative formation, pointing to further downside in WTI, he said.

On the flip side, the 100-week SMA of $77.50 may act as support, causing a short-term rebound towards the broken-support-turned-resistance levels of $82.20 and $86.20, Dixit said. Adding:

“If prices make a sustained break above this zone, we expect recovery towards $90.50 - $91.50."

We get inundated this week with a host of US data, including durable goods, consumer confidence and home sales reports.

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The big day to watch will be Friday, when the August personal income and expenditure reports—that include the Fed’s preferred inflation gauge—drops.

Fresh off another 75 basis point rate increase, Fed officials - St. Louis Fed President James Bullard, Cleveland Fed President Loretta Mester, Chicago Fed head Charles Evans, Atlanta Fed President Raphael Bostic and Fed Vice Chair Lael Brainard are all due to speak this week. Traders will be parsing their comments for clues as to whether policymakers are leaning toward a fourth straight 75 bps rate hike in November. Bostic particularly spoke of a “relatively orderly” slowdown Sunday.

In the Eurozone, Friday’s inflation data is likely to pile pressure onto the European Central Bank. Ahead of that, ECB President Christine Lagarde is due to testify before lawmakers in Brussels on Monday, while the results of Italy’s elections on Sunday will also be closely watched. The yen will remain in focus after the Bank of Japan intervened in foreign exchange markets. Meanwhile, Chinese PMI data on Friday will give an insight into the health of the world’s number two economy.

Those shorting oil, meanwhile, seemed convinced they’re on the right path.

Fueling their bets were global equities at a two-year low last Friday versus the dollar at 20-year highs as weak European purchasing managers indexes and growth concerns after rate hikes by the Fed to the Bank of England created a perfect storm for oil bulls.

"The market is clearly thinking economic slowdown," Scott Shelton, energy futures broker at ICAP in Durham, North Carolina, said as recession fears were omnipotent across markets.

"Whether or not physical [oil] grades are strong or weak matters not currently.”

Long-leaning analysts, however, warned that the risk of war escalation in Ukraine by Russia and China's opening up from COVID lockdowns could mean plenty of upside for oil in the coming weeks.

They also point to something else that in their view the bears are completely blind to: The daily release of one million barrels of crude from the US Strategic Petroleum Reserve (SPR) by the Biden administration. The total 180 million barrel release that will end in October has practically flooded the US market for crude and alleviated some of the deficit as well on the global market for oil from shortfalls in sanctioned Russian supply. When the SPR outflows run out in six weeks, oil will explode higher, many bulls are convinced.

Maybe not, say analysts at Ritterbusch and Associates, the Chicago-based oil consultancy formed by veteran oil trader Jim Ritterbusch, which believes that a continued surge in US interest rates and the dollar will limit oil’s gains.

Last week’s selloff has raised speculation about potentially corrective action coming from the 13-member, Saudi-led Organization of the Petroleum Exporting Countries (OPEC), and its 10 allies steered by Russia (OPEC+).

But OPEC+’s monthly meeting only falls on Oct. 5—over a week from now—leaving oil bulls still vulnerable for this week.

At next week’s meeting, the 23-nation coalition of oil producers and exporters will decide on output for November and onwards. Bets are high among longs that OPEC+ will announce its first major post-pandemic reduction in supply to stop the sinking market in its tracks and enable some price recovery.

As it is, oil is already down almost 40% from the March peak of around $130 for WTI and nearly $140 for global crude benchmark Brent, which came a fortnight after the outbreak of the Russia-Ukraine war.

Oil bulls are not just counting on OPEC+ to announce an output cut. They are actually demanding it, exhorting the alliance to “stop playing nice” with short-sellers.

Under ordinary circumstances, the Saudis, who are in charge of the oil-producing group, would love to announce a sharp cut and send crude prices spiraling. There is enough bad blood between oil bears and Saudi Energy Minister Abdulaziz bin Salman (AbS), whose abhorrence for those on the short-end of the trade is well known.

Yet, AbS might be facing different complications this time.

And that complication has largely to do with the biggest force within OPEC+ that the Saudis have relied on for the past six years: Russia.

Just like OPEC+’s only known response to a price crash is to cut production, Russia’s only known way to ease the pain of its self-inflicted crisis of sanctions from the Ukraine war is to deeply discount its oil to those willing to buy from it.

Adding to this Russian crisis is the steady advance made by the Group of Seven nations to have in place by early December a working mechanism to cap the price of oil sold by Russia, in order to limit the Kremlin’s ability to fund its war against Ukraine.

While Moscow has vowed retaliation against countries that implement the decision, it is also likely to undercut other OPEC+ producers in selling its oil wherever possible to make up for lost revenue. Russia’s aggressive discounting on oil on the physical market will ultimately matter on the futures market, aside from weighing on the pricing of competing OPEC+ oils, including Saudi crude.

Since the formation of OPEC+ in 2016—which came after the Saudis virtually bent over backwards to bring the Russians in—Riyadh has typically cut the most in any load shedding act, followed by the United Arab Emirates (UAE). This is understandable in the context of the two being the only real so-called swing producers with the ability to add or subtract anytime.

Yet, now might be a bad time for the Saudis or Emiratis to do substantial production cuts when the Russians could be looking to sell every barrel they could to any customer anywhere in the world as the West’s sanctions squeeze Russia’s finances and—most importantly—President Vladimir Putin’s ability to fund his war against Ukraine.

Simply put, any barrel of market share lost by Saudi Arabia and the UAE will go to Russia, says John Kilduff, founding partner of New York-based energy hedge fund Again Capital.

Adds Kilduff:

“Preserving Russia within OPEC+ is paramount to the Saudis as the alliance itself will collapse without the Russians. But how do you effectively support an ally through difficult times when the ally is increasingly becoming a liability?”

Disclaimer: Barani Krishnan 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. He does not hold positions in the commodities and securities he writes about.