Oil Prices Forecast: OPEC Production Cuts vs. Asia’s Economic Dip Set Flat Tone

Highlights

• OPEC+ leaders, Saudi Arabia and Russia, plan to extend their oil supply cuts.
• Despite OPEC’s efforts, China’s economic stumble threatens to drag down oil prices.
• Stronger U.S. dollar index may suppress global demand for dollar-based crude oil.

Global Forces Pulling Oil Prices in Opposite Directions

The tug-of-war between supply and demand continues to baffle oil traders. On one hand, leading OPEC+ members Saudi Arabia and Russia are poised to extend oil supply cuts, with Saudi Arabia likely to roll over its voluntary 1 million barrel per day (bpd) cut into October and Russia set to announce a new OPEC+ deal. Moscow has already slashed exports by 300,000 bpd in September, following a 500,000 bpd cut in August.

These expected cuts typically boost prices, but they’re being counterbalanced by China’s faltering economic recovery, keeping the oil markets in a state of limbo.

Economic Indicators in the West

In the United States, economic signals are mixed but lean towards a stable monetary policy, at least for now. U.S. job growth saw an uptick in August, but the unemployment rate also edged up to 3.8%. Market sentiment strongly suggests the Federal Reserve is done with rate hikes for the moment.

According to the CME FedWatch tool, there’s a 93% chance the Fed will keep rates unchanged in its upcoming meeting and around a 60% likelihood of no more hikes this year. In Europe, ECB President Christine Lagarde emphasized the need for central banks to anchor inflation expectations amidst labor and energy market shifts, as well as geopolitical uncertainties.

Currency Impact

In the currency arena, a minor rise in the dollar index—up 0.086%—could slightly dent foreign demand for dollar-denominated crude oil. A stronger U.S. dollar typically puts downward pressure on oil prices as it makes the commodity more expensive for buyers holding other currencies.

Concerns in Asia

Further complicating the global oil outlook are developments in Asia. China, the world’s second-largest economy, is struggling with weak domestic demand despite various policy stimulus measures. A recent private-sector survey indicated that China’s service activity expanded at its slowest pace in eight months. Meanwhile, in Japan, household spending in July plummeted 5.0% year-over-year, significantly worse than the forecasted 2.5% decline, adding to the uncertainty surrounding demand.

Short-Term Outlook: Bearish to Neutral

The market faces conflicting forces: expected supply cuts from OPEC+ members and economic slowdowns in China and Japan. With the U.S. Federal Reserve likely holding rates steady, it’s a complex backdrop that leaves oil markets with a bearish to neutral short-term outlook. Given the mixed signals, traders would do well to brace for a period of heightened volatility.

Technical Analysis

The current 4-hour price of $85.75 is trading above both the 200-4H moving average of $80.91 and the 50-4H moving average of $82.04, indicating bullish sentiment. The 14-4H RSI reading of 72.35 suggests the market is in overbought territory, signaling potential caution.

Support levels are established between $84.89 and $83.81, with the market trading just above this zone. Resistance is determined between $88.68 to $90.10, serving as potential upside targets. Despite the bullish indicators, the overbought RSI advises traders to be cautious of potential price retractions or consolidations.