Oil Price Talking Points

The price of oil extends the advance from the July-low ($54.72) even though the International Monetary Fund (IMF) lowers its growth forecast for the world economy, and crude prices may continue to retrace the decline from earlier this month as US inventories are expected to contract for the sixth consecutive week.

Waning US Crude Inventories to Keep Crude Oil Prices Afloat

Oil prices may stage a larger rebound despite the turmoil surrounding the Strait of Hormuz, a key hub for crude shipments, should data prints coming out of the US economy indicate healthy demand.

Updates from the US Energy Information Administration (EIA) are anticipated to show crude inventories narrowing 4261K after contracting 3116K in the week ending July 12, and waning stockpiles may keep oil prices afloat as the Organization of the Petroleum Exporting Countries (OPEC) and its allies pledge to regulate the energy market throughout 2019.

However, another batch of mixed data prints may drag on crude prices as the US and China, the two largest consumers of oil, struggle to reach a trade agreement, and OPEC and its allies may take additional steps to balance the energy market as the shift in trade policy curbs the outlook for global growth.

It remains to be seen if OPEC and its allies will establish a lower rate of production as the most recent Monthly Oil Market Report (MOMR) states that “in 2019, the global oil demand growth forecast remains at 1.14 mb/d, with expectations for global oil demand to reach 99.87 mb/d.”

As a result, the group may stick to the sidelines ahead of the next meeting on December 5 as “in 2020, the initial forecast indicates growth of around 1.14 mb/d y-o-y, as global oil demand is anticipated to surpass the 100 mb/d threshold on an annual basis, to average 101.01 mb/d for the year.”

The projections suggest OPEC and its allies are in no rush to curb supply, and the weakening outlook for the world economy may keep oil prices under pressure amid little signed of an imminent US-China trade deal.

With that said, oil prices remain at risk of facing a bear market over the coming months especially as a ‘death-cross’ formation takes shape in July.

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Crude Oil Daily Chart

Keep in mind, the broader outlook for crude oil is no longer constructive as both price and the Relative Strength Index (RSI) snap the bullish trends from earlier this year.

At the same time, a ‘death cross’ formation has taken shape in July as the 50-Day SMA ($57.15) crosses below the 200-Day SMA ($57.65), with both moving averages tracking a negative slope.

Nevertheless, the decline from the monthly-high ($60.94) appears to have stalled ahead of the Fibonacci overlap around $54.40 (23.6% retracement) to $55.60 (61.8% retracement), with a move above the $56.70 (38.2% retracement) to $57.40 (61.8% retracement) region raising the risk for a move towards the $5 8 . 6 0 ( 50% retracement) to $59.70 (50% retracement) area.

For more in-depth analysis, check out the 3Q 2019 Forecast for Oil

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.