Oil Price Forecast: Volatile Trade as Tight Supply Offsets Credit Downgrade

Highlights

• WTI crude oil prices stable despite previous session’s steep decline.
• Anticipation of tightening supply supports oil prices despite bearish sentiment.
• Record stockpile drop suggests global demand outpacing supply due to major producers’ cuts.

Overview

US benchmark West Texas Intermediate (WTI) crude oil prices saw little change on Thursday following a steep decline the previous session, partly due to the U.S. government’s credit downgrade impacting sentiment. Fitch, the ratings agency, downgraded the long-term foreign currency ratings of the U.S., citing concerns about fiscal deterioration, political polarization, and the international status of the U.S. dollar – the world’s biggest oil consumer.

Oil Supported Amid Tightening Supply

Amidst this bearish sentiment, the oil prices are finding some support from the anticipation of tightening supply. Major producers’ output cuts, likely to remain in place following a meeting on Friday, are contributing to these concerns. Despite a 2% drop after the ratings downgrade, WTI prices had a remarkable 16% surge in July, propelled by supply constraints.

The recent pullback in oil prices was anticipated given the steady rise over the past month. However, it’s expected that the oil market will continue to be tight in the short-term, potentially making prices susceptible to a further decline.

Record Crude Stockpile Drop Signals Demand Surge

The significance of supply constraints was evident as U.S. crude stockpiles saw a record 17 million barrel drop last week, exceeding analysts’ expectations. This points to a scenario where global demand is outpacing supply, mainly due to the deep cuts made by major producers.

OPEC+ Meeting: Limited Output Changes

Looking ahead, the next OPEC+ market monitoring committee meeting, scheduled for Aug. 4, is unlikely to make significant changes to the current oil output policy. Saudi Arabia is expected to extend its voluntary 1 million bpd cut for another month, up until September.

China’s Policies Boosting Crude Market

Additionally, supportive government policies aimed at boosting China’s economy – the world’s second-largest oil consumer – are also contributing to price support and fuel demand. On a positive note, China’s services sector expanded at a quicker pace in June, offsetting disappointing manufacturing data earlier in the week.

Considering China’s further stimulus policy and the sharp drawdown in U.S. inventory data, the fundamentals appear to be strong reasons for a rebounding crude market.

Short-Term Outlook:  Heightened Volatility Expected

In conclusion, while the U.S. credit downgrade has impacted sentiment, the tight supply situation and supportive policies in China are holding up the oil prices for now. The oil market may experience short-term volatility, but the overall outlook remains promising with strong underlying factors supporting a potential rebound.

Technical Analysis

Based on the provided 4-hour chart data for Crude Oil, the current price of 79.54 is above the 200-4H moving average of 74.27 but below the 50-4H moving average of 79.89, indicating mixed market sentiment. The 14-4H RSI reading of 40.73 suggests a bearish bias.

The main support area lies between 73.81 and 74.62, while the main resistance area is between 81.73 and 83.63. As the market exhibits mixed signals, with the price positioned between key moving averages and RSI signaling a bearish tone, traders should exercise caution and monitor price action around support and resistance levels for potential trend shifts.

Given its proximity to the 50-4H moving average, trader reaction to this level at 79.90 is likely to set the tone on Thursday.