It looks like the oil market is in for a few months of volatility as prices rise and fall with much surprise and speed.
After a strong performance early in the week, some even calling it a rally after a run of falling prices in previous sessions; the oil price took a dive later in the week as pandemic pressure weighed on the market.
In Friday trading, Brent crude was still priced above US$71 with West Texas Intermediate (WTI) holding around US$67 a barrel.
It’s difficult to pin-point one major factor shifting the market and the US Energy Information Administration said US crude inventories fell last week as demand increased.
Near the peak in US demand
The summer driving season has a couple of weeks to run and gasoline demand remains strong, but a note from Capital Economics says “we are near the peak in US demand which will act as a lid on oil prices”.
The spread of the Delta variant continues to hamper global economic recovery.
Commerzbank says “it has more to do with the psychology of market participants than with any deterioration of fundamental data”.
Goldman Sachs (NYSE:GS) warns to keep an eye on developments in China where there’s no new Covid cases and some growing signs of demand. Goldman sees “steadily tightening commodity fundamentals,” that could push oil prices higher towards the end of the year.
Looking at the US economy, the long awaited recovery of 2021 remains uncertain. In the US, the Delta variant is spreading with a vengeance and as Jason Schenker, president of Prestige Economics says when examining this week’s US jobless claims, “it could take years for the labour market to fully return to pre-COVID levels of joblessness when only 2.1 million Americans were collecting unemployment benefits. Plus, the COVID Delta variant presents near-term risks to the labour market”.
Looking at the wider economy, the Chairman of the US Federal Reserve, Jerome Powell delivered his annual speech at Jackson Hole in Wyoming.
The market has been eagerly waiting on this news as it’s where the Fed delivers views on the economy and hints at future monetary policy.
Central banks around the world usually follow the lead from the Fed. He noted that the Delta variant still “presents a near-term risk,” and labour markets “are improving but turbulent”.
Schenker said there were no real surprises as, “peak monetary policy accommodation for the Fed is in the rear-view mirror. Powell’s comments today reaffirm that Fed policy is likely to tighten, but at a slow pace”.
Good run this year
The energy sector has had a good run this year with stocks performing well on the wider stock market. Volatility in the wider market remains, with financials, real-estate and communication services topping the trend. Energy comes in as the fourth strongest performer, having been the best performer earlier in the year.
Where the oil price will go is anyone’s guess as we have seen all year.
Most analysts still look to a growth in demand in the second half and many are still bullish on a price rise.
Looking at the technicals, traders are observing “a golden cross” in the weekly charts, often a signal of higher prices to come. Matt Maley, chief market strategist from Miller Tabak told CNBC that this is a rare occurrence, happening only three times since the beginning of the century and always followed by a rally in price.
Oil fundamentals will be back on the agenda next week as OPEC and friends prepare for their September virtual meeting.
A recent call from the US for more barrels on the market might also be taken into consideration, but ministers will be looking at supply and demand as we approach the final quarter of this eventful year on the oil market.