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Crude Oil Consolidation Continues

by Fawad Razaqzada

The price of oil has been trading sideways for more than two weeks now. Clearly, there has been no real conviction from either the buyers or the sellers during this period. And who could blame them? After all, there seems to be no consistency in oil data and forecasts from top oil agencies. What’s more, the negative impact of a stronger dollar on the buck-denominated commodity has been offset by the rallying equity markets, which from time to time has boosted the appeal of risky assets across the board, including crude oil and copper. Added to all this, long-term financial speculators seem to have booked profit as net long positions in Brent were trimmed for the fifth consecutive time in the week to 12 July, as per ICE’s latest positioning data. But these same speculators may soon use this recent selling as an opportunity to reload their long positions. Bullish speculators have also been disheartened by signs US oil production may start to rise again, although the falling crude inventory levels has kept their hopes alive that WTI oil prices may still climb north of $50 in the coming months. On top of this, macro numbers from China and the US, the world’s largest economies and biggest consumers of oil, have been improving in recent months and if the trend continues in the coming weeks then this should help to boost oil’s demand prospects.

So there is lots of conflicting macro pointers and while confusion remains high and no major clear catalyst in place, oil prices are likely to trade in large ranges. As such, there should be plenty of decent opportunities for both the buyers and the sellers as long as they remain patient and trade around their key support and resistance levels. Overall, however, I still think oil prices are more likely to head significantly higher than significantly lower from current levels over the next several months as the market is likely to tighten further.

This week’s focus will be primarily on corporate earnings and the ECB meeting on Thursday, which could impact the Dollar Index vis-à-vis the EUR/USD exchange rate and therefore buck-denominated commodities such as crude oil and gold. Ahead of the ECB meeting, the usual weekly crude inventories data from the API and EIA could help to provide some near-term direction for oil.

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