Fed Or No Fed, Road Ahead For Oil Bulls May Be Bad

Oil longs are counting on Fed Chair Jerome Powell to sprinkle some magic dust on crude from the podium of Jackson Hole symposium in Wyoming.

Bears, meanwhile, are counting on ramping U.S. crude production to continue offsetting supply outages or sudden spikes in demand.

Regardless of the outcome in either, crude prices could remain boxed in sideways trading for weeks to come as both camps seek the perfect catalyst to serve their positions— amid the winding down of the U.S. driving season and threats to shale drilling.

Just a couple of weeks ago, oil prices were experiencing some of their greatest volatility ever as the U.S.-China trade war yanked crude around like a yo-yo.

Peaks And Valleys Could Continue; Smaller Zigzags Too

While the price gyrations of recent weeks could continue, there may also be more of the smaller zigzag patterns in a day involving just a few cents.

WTI 60-Min Chart - Powered by TradingView

Case in point were the crude price moves on Tuesday and Thursday, where the change was just about a quarter-point percent or more. In contrast, the swings on Monday and Wednesday were 2.4% and 1.2%, respectively, as the market rallied first on a reversion of the U.S. yield curve that offset recession fears, and fell later as the Federal Reserve’s July meeting minutes downplayed the probability of deep rate cuts.

As the peak U.S. summer driving season nears its end with the approach of Sept. 2 Labor Day holiday, longs in the market are clinging to any support they can find.

But range-bound trades may be their best hope if the Fed doesn't resort to cut rates like they expect, or the U.S.-China trade spat continues to be a drag on the global economy, choking implied demand for crude.

‘Strong Sell’ Call On WTI, ‘Sell’ On Brent

Investing.com has a “Strong Sell” recommendation for West Texas Intermediate crude on its Daily Technical Outlook, projecting a bottom-tier support of $54.79 per barrel, as opposed to Thursday’s settlement of $55.35.

For Brent crude, the benchmark for oil outside of the U.S., the recommendation is a “Sell”. Investing.com’s Daily Technical Outlook projects a bottom-tier support of $59.29 per barrel, versus a last settlement of $59.92.

Fundamentally, oil’s demand prospects aren’t promising at all, although supply snags can continue providing support at the lower level. Hence the projected scenario of range-bound trading, and occasional price spikes.

Olivier Jakob, founder of the Petromatrix oil consultancy in Zug, Switzerland, noted on Thursday that U.S. crude oil imports from Saudi Arabia remained very low at 406,000 barrels per day over a four-week average. U.S. crude oil exports, in contrast, stand at a steady 2.48 million bpd, though well short of the 4-week average high of 3.40 million bpd in June.

U.S. Crude Production Unyielding

And the U.S. Energy Information Administration reports that crude production in the United States has been unyielding for three straight weeks at 12.3 million bpd.Said Petromatrix’s Jakob:

“Current U.S. crude oil exports are close to 1 million bpd below recently shown capacity, and this at a time when the pipeline capacity to the U.S. Gulf is increasing.”

“Unless the U.S. starts to accelerate the pace of crude oil exports, it will be difficult to avoid crude oil stock-builds in October when U.S. refinery runs come down seasonally (on top of the U.S. Strategic Petroleum Reserve sale).”

Oil Bears Have Worries Too In Shale Country

For oil bears, what may be worrisome is the slowdown in shale drilling, which might ultimately impact U.S. production.

Producers in the nation’s oil-rich shale basins are dialing back growth plans in the face of a growing panoply of problems that’s killing returns and keeping skeptical investors at bay, Bloomberg reported last month.

The constraints are manifold, said the report, citing pipeline limits, reduced flow from wells drilled too close together, low natural gas prices and high land costs.

It adds:

“But the most consequential is that shale-well production falls off at such a high rate—as much as 70% in the first year—that you need to keep spending cash on new wells just to maintain output.”