Commodities Week Ahead: Oil Bulls Cling to $80 as Fed Minutes, Retail Sales Beckon

After a seven-week rally, oil bulls are clinging to $80 per barrel pricing and looking to the Federal Reserve to reveal the deliberations that led to last month’s rate hike as markets look for signals on what the central bank could decide when it meets again In September.

Also slated for release this week is U.S. retail sales, which lands on Tuesday, a day before the release of the July meeting minutes of the Fed’s policy-making Federal Open Market Committee, or FOMC.

The Fed raised rates by 25 basis points last month and left the door open to another hike in September. The minutes will help investors gauge the appetite for further rate increases, although markets are expecting a pause in September.

Data last week showed that while U.S. consumer and producer prices increased moderately in July, the overall trend indicated that inflationary pressures were easing.

The retail sales numbers from the Commerce Department are expected to show a pickup in demand at the start of the third quarter after a smaller-than-expected increase in June.

That and other data through August will paint a broader picture for investors on what the Fed is likely to say at its annual get-together in Jackson Hole, Wyoming, at the end of this month.

The U.S. central bank has increased interest rates by 5.25 percentage points since March 2022 to bring inflation back down to its 2% goal.

Other data this week is expected to indicate that the manufacturing sector is still struggling - the Empire State manufacturing index is expected to fall into negative territory, while the Philly Fed manufacturing index is expected to remain in negative territory.

Housing sector numbers are expected to be more positive with Wednesday’s reports on building permits and housing starts expected to show signs of stabilization.

The U.S. is also to release on Thursday the weekly report on initial jobless claims, which is expected to tick lower after a larger-than-expected increase last week.

Crude prices extended their rally last week after the closely-followed International Energy Agency forecast that world oil demand could hit a record high this month. The seventh-week rally was the longest winning streak for oil bulls since June 2022.

Some analysts say the near two-month rally isn’t showing signs of exhaustion. But evidence is pointing to the contrary.

U.S. West Texas Intermediate, or WTI, rose less than 0.5% in the just-ended week.

It was the smallest weekly advance for the U.S. crude benchmark since the run-up which began in the week to June 16. It compares with the near 5% rise from two weeks ago and the 5%  also achieved on the second week of this rally.

Despite the slowdown, WTI did hit a 9-month high of $84.89 per barrel on Thursday. In just under two months, the U.S. oil benchmark has gained up about 20% in all.

And it’s not just WTI. London-based Brent crude also rose meagerly for the week. It settled at a little under $87 per barrel, up 0.5% on the day and 0.7% higher on the week.

Like WTI, the weekly gain for Brent was the smallest since the oil rally, which began seven weeks ago. But in a similar trend to its U.S. counterpart, the global crude benchmark touched a new milestone on Thursday, reaching a seven-month high of $88.10.

In under two months, Brent has gained 18%. In Monday’s early session in Asia, both WTI and Brent were down about 1% each.

Ed Moya, analyst at online trading platform OANDA did acknowledge that after a seven-week run-up, complacency was setting into the oil market and that sometimes you get a decent pullback.

And that complacency could become more evident from next week if a couple of key resistance levels are successfully triggered, resulting in greater pressure for longs to take profit or shorts to wage a bear assault on what may be regarded as an overextended market.

“During the upcoming week, oil markets are likely to witness a test of the 100-week SMA, or Simple Moving Average, resistance of $85.60 or even a tad higher at the monthly Middle Bollinger Band of $86.90,” said Sunil Kumar Dixit, chief technical strategist at SKCharting.com.

“This would be a challenging moment for bulls, as if they fail to defend these heights, bears will be interested in a better risk-reward math.”

Dixit noted that seven weeks of consistent bullish rebound takes a breather at $84.90 as prices approach the horizontal resistance zone 100 Week SMA $85.60.

In the event a correction from the higher resistance zone begins, a break below the daily Middle Bollinger Band of $80 will be the initial sign of momentum exhaustion, closely followed by a quick drop to the 50-week EMA, or Exponential Moving Average, of $78.80, said Dixit.

“If selling intensifies below this line, expect the short term trend turning bearish with a further drop to the 50-day EMA of $76.90 and the 200-day SMA of $76.30.”

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Disclaimer: The content of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.