Oil Price Forecast: Market Optimism Supportive Despite Risk of Correction

Highlights

• Oil prices stable near three-month high.
• Tightening global supply and robust US demand.
• OPEC+ meeting’s potential impact on prices.

Overview

Crude oil prices held steady on Tuesday, hovering near a three-month high reached on Monday. The market was influenced by signals of tightening global supply as producers continued to implement output cuts. Furthermore, robust demand in the United States, the world’s largest fuel consumer, played a crucial role in supporting the prices.

Risk of a Correction

There is, however, a potential risk of correction for oil prices, considering the possibility of the market being overbought in the past month. Despite this, there are still bullish factors at play. A softened U.S. dollar and China’s policy optimism are likely to provide support to crude futures. A weaker greenback makes dollar-denominated oil more affordable for holders of other currencies, which can increase demand.

US Soft-Landing Fueling Optimism

Moreover, signs of a soft-landing in the U.S. economy have positively impacted the outlook for oil demand. Chinese authorities have released additional policy guidelines aimed at boosting the country’s economy and domestic consumption, especially after witnessing a contraction in manufacturing activity for the fourth consecutive month in July.

Saudi Arabia Exending Supply Cuts

Anticipation is building ahead of this Friday’s ministerial meeting of the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+. Experts from National Australia Bank (NAB) predict that oil prices may reach 2023 highs, with expectations that Saudi Arabia’s voluntary supply cuts will likely be extended for another month.

In June, OPEC+ agreed to limit oil supply until 2024, and Saudi Arabia went even further by pledging an additional voluntary cut of 1 million barrels per day for July. The data indicates that the Saudi Arabian cuts fell slightly short of the target, with output down by 860,000 bpd in July, while total production from OPEC was 840,000 bpd lower.

Consequently, U.S. figures released on Monday showed a rise in fuel demand to 20.78 million bpd in May, the highest since August 2019. Gasoline demand also surged to 9.11 million bpd, the highest since June 2022, according to data from the Energy Information Administration.

Bullish Inventories Decline Expected

As for last week’s outlook, U.S. crude oil and gasoline stockpiles were expected to have declined, based on a Reuters poll which estimated that crude inventories fell by about 900,000 barrels in the week to July 28.

Short-Term Outlook:  Cautiously Bullish

In summary, oil prices maintained their upward momentum, primarily due to tightening global supply and robust demand in the U.S. and China. Though some caution is advised due to the risk of correction, market analysts remain optimistic about the potential impact of the OPEC+ meeting on prices.

Technical Analysis

The Crude Oil market remains bullish as the current price of $81.52 is above both the 200-4H and 50-4H moving averages, indicating a positive trend. The 14-4H RSI reading of 69.91 confirms strong momentum.

The main support area lies between $73.81 and $74.62, while the main resistance area is between $81.73 and $83.63.

The market may encounter a challenge on a test of the main resistance area, possibly leading to a temporary pause or slight pullback. Overall, the market sentiment remains optimistic, but traders should exercise caution in the proximity of the main resistance area due to nearly overbought conditions.