Crude oil looking fatigued after its breakneck run higher

Crude oil is looking fatigued after its breakneck run higher, failing for two consecutive sessions to break convincingly through the $88 per barrel level. With RSI sitting in overbought territory and headlines boasting oil is on the longest wining streak in years, the technical and contrarian indicators are starting to flash warning signals about a potential near-term pullback. But with fundamentals underpinning this latest bout of strength, any pullback will provide an opportunity for traders to add or establish fresh longs.

Crude oil in beast mode

There’s no doubt about it; crude oil has been in beast mode since the start of July, and for good reason. Supply is being constricted by the world’s largest exporters – Saudi Arabia and Russia – who committed to maintaining the status quo until the end of the year earlier this week. Saudi will reduce production by one million barrels per day until December. Meanwhile, Russian exports will be cut by 300,000 barrels per day over the same period.

At the same time, demand is strong despite all the negativity about the global economy, especially in relation to China. According to data from the International Energy Agency, world fuel usage hit a record high 103 million barrels per day in June, boosted by air travel, power generation and petrochemical production in China. The agency forecasts demand for crude oil will lift by 2.2 million barrels per day this year, 70% of which will come from China. Meanwhile, global supply is tipped to increase by just 1.5 million barrels per day.

As a result of the mismatch, oil inventories in developed nations have fallen to around 115 million barrels below their five-year average. In the United States, the largest consumer globally – stockpiles have fallen to lows not seen since late 2022 ahead of fresh data from the US Energy Administration on Thursday.

Fundamentals suggest crude oil dips will be shallow

With strong fundamentals underpinning the market, it comes as no surprise that US crude prices have surged over 30% in a little over two months, including 13% over the past two weeks, leaving it at the highest level since November. It also means that in the absence of a sharp deterioration in the US economy, or a reversal of the OPEC+ restrictions on supply, pullbacks are likely to be limited in the near-term.

But we may be on the cusp of one right now. It’s moved a long way fast and everyone seems bullish, creating an opportunity to lean against stretched positioning. However, the risk-reward does not favour meaningful downside, but nor does buying right now given the run we’ve had. As such, if we do ease lower, it will offer an attractive entry point to establish long position.

Dips towards $86 per barrel or even slightly below may be suitable for such a trade given it sits above a meaningful support zone beginning at $84.50 per barrel. A stop below the bottom of that zone at $83.50 will offer protection against a trend reversal. On the topside, $88 per barrel is a level that must be overcome after two consecutive failures. A break there puts crude on target to move towards $93 per barrel.

Source: Trading View

-- Written by David Scutt

Follow David on Twitter @scutty

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.