Supply-demand dynamics, inventory fluctuations, and geopolitical tensions characterize the crude oil market landscape. Analysts at Morgan Stanley project the market to reach equilibrium by the fourth quarter of this year, potentially transitioning to a surplus by 2025. As traders await crucial US oil inventory data, the market is also reacting to geopolitical events, such as the Israeli attack on a Yemeni shipping terminal in retaliation for a recent drone attack on Israel. Also, a Ukrainian drone attack on Russia's largest Black Sea oil refinery may cause global supply disruption. Despite these tensions, the short-term outlook for oil prices remains bearish, influenced by ample inventories and weak demand.
Traders are focusing on the release of US oil inventory data. The American Petroleum Institute (API) will provide its estimates on Tuesday. The prior week's report showed US crude oil inventories declining by 4.44 million barrels for the week ending July 12. Today's API report is expected to show a smaller draw of -2.47 million barrels. On Wednesday, the US Energy Information Administration (EIA) will release its report, which is expected to show a build of 0.7 million barrels, a first in three weeks.
In recent market performance, crude oil prices fell to their lowest in over a month on July 23. Crude oil September futures traded at $76.40 per barrel after failing to trade through contract highs of $85.06 on June 2022. Traders have primarily ignored escalating Middle Eastern and Russia-Ukranian tensions, focusing instead on weak technical outlooks, soft demand, and possibly a win by Trump in the upcoming November presidential election. Trump has vowed to "Drill Baby, Drill" on the first day in office, leading to significant supply to the global oil markets.
The short-term forecast for oil prices remains bearish, with ample inventories and weak demand signaling continued downward pressure. However, geopolitical tensions and potential supply disruptions could provide some support.
Will a seasonal sell pattern contribute to lower prices?
Source: Barchart
The technical chart for September crude oil futures shows the seasonal pattern (green line) that prices have closely followed since January.
The minor daily downtrend confirms the upcoming seasonal sell. The September futures contract will expire on August 20, 2024. The seasonal pattern reflects that crude oil has sold off over the past 15 years into this expiration period. The reasons for this could be one of many. With weak energy demand, refiners of gasoline may be well stocked to get through August, especially if gasoline inventories have been built, which they have.
Seasonal Pattern
Source: Moore Research Center, Inc. (MRCI)
MRCI research has found a historical pattern in which crude oil prices have moved for 15 years (black line). I've overlaid this on the prior chart with a green line on the recent price action. July typically sees a rally, and sellers then come into the market and push prices down to the expiration date of the September crude oil contract.
It's important to note that while seasonal patterns can provide valuable insights, they should not be the sole basis for trading decisions. Traders must consider other technical and fundamental indicators, risk management strategies, and market conditions to make well-informed and balanced trading choices.
In closing….
A complex interplay of supply-demand dynamics, inventory fluctuations, and geopolitical tensions characterizes the crude oil market. Morgan Stanley analysts predict the market will balance by the fourth quarter of this year, potentially shifting to a surplus by 2025. Traders will closely watch US oil inventory data, with the API and EIA reports providing critical insights. Recent geopolitical events, including Israeli and Ukrainian attacks affecting oil infrastructure, could disrupt global supply, though the short-term outlook remains bearish due to ample inventories and weak demand.
Crude oil prices have recently fallen to their lowest levels in over a month, with September futures trading down after failing to breach previous contract highs. Market focus has primarily ignored escalating geopolitical tensions, instead centering on weak technical outlooks and soft demand alongside potential political changes in the US that could impact oil supply. Seasonal patterns indicate a potential for further price declines as the September futures contract approaches expiration. However, traders are advised to consider a range of technical, fundamental, and risk management indicators in their decision-making.
On the date of publication, Don Dawson did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
