Oil Futures: Calm before the storm - Charles Schwab

FXStreet reports that oil futures prices have been trading in a relatively tight price range so far this month with the lead month September futures showing a trading range of less than $3 so far in July. The recent increases in demand may begin to wane as the coronavirus outbreak could cause nations that are seeing rising cases to halt or even pull back on the reopening measures, per Charles Schwab.

“OPEC is expected to reduce its production cuts by about 2 million barrels per day to 7.7 million barrels per day starting August 1. However, OPEC has cautioned that oil demand could fall if the next wave of the coronavirus outbreak is not contained.”

“Looking at the daily chart for September 2020 Crude Oil futures (CLU20), we notice the market forming a rising wedge formation that began in early June. This chart pattern is generally considered a bearish formation but confirmation of a breakdown in prices from the pattern is needed for confirmation.”

“We note a bearish divergence in the 14-day RSI as this momentum indicator has been trending lower despite a moderate up-move in prices overall.”

“The March 6 chart ‘gap’ at 42.49 remains unfilled and looks to be the next major resistance level for the September futures. Chart support is seen at the 50-day moving average, currently near the 34.64 price level.”

FXStreet notes that full compliance by OPEC+ members will limit the increase in output from August. The next Joint Ministerial Monitoring Committee meeting is scheduled on 18 August. Rising COVID-19 case numbers could see another reduction in traffic while refinery margins have yet to recover, suggesting refiners’ demand will stay subdued, per ANZ Bank.

“OPEC+ agreed to reduce its production cuts by 2mb/d to 7.7mb/d from August. Full compliance from other members and its commitment to compensate for higher production in May and June could limit this increase to 1mb/d.”

“Demand recovery will absorb some excess, helping bring the market into balance by Q4 2020.”  

“A resurgence in COVID-19 cases remains a key risk, as renewed lockdowns could undermine the demand recovery.”