The oil price has been swung around like a rag doll in the past couple of months. The focus on supply factors has been shoved aside as traders have fretted over the outlook for oil demand. Concerns over an impending recession in the US have dominated the narrative. However, this may have become overdone for now. Is the pendulum ready to swing back higher once more?
- Encouraging signs in the US jobs report have helped to fuel a recovery for oil
- The technicals continue to range
- US CPI and the OEPC monthly oil report will be key for volatility this week
- US oil stocks continue to follow the prospects of NYMEX
Nonfarm Payrolls fuel a recovery in oil
April was a volatile month for oil. An initial spike higher as OPEC+ cut production by more than -1.1m barrels per day. Goldmans and the like were quick to make claims of $90 or even $100 oil once more. However, the focus quickly switched from a supply-led rally to a demand-led sell-off.
Or perhaps I should say, lack of demand. For weeks, traders have been worried about the growing narrative of a recession in the US. Lower growth potential for the world’s largest economy means less demand for oil. This has helped to drive NYMEX WTI from the mid- $80s to the mid-$60s in just three weeks. At its maximum, US oil futures had fallen more than -23%.
However, oil is starting to find a recovery. There had been the tentative formation of support developing on Thursday, but a decisive recovery has taken hold since the Nonfarm Payrolls data.
This was expected to be the month that the signs of strain in the US labor market were expected to show in the headline Nonfarm Payrolls data. Monthly US jobs growth sitting below 200,000 implies a US labor market limping along at best.
However, traders had a surprise again, with the US labor market remaining strong. Jobs growth at 253,000 along with unemployment dropping to record levels and wage growth higher than expected. A downward revision to the March data was the one fly in the ointment, but the US economy is proving to be more resilient than some had expected.
More resilient jobs data implies more resilient oil demand and a rebound has kicked in.
The technicals show a trading range in oil
So oil has bounced. For me though, this is merely an extension of what has been playing out over recent months. Oil is in a choppy range trade.
The case for a sustainable move lower on oil is restricted by the appetite of OPEC+ to hold the oil price higher. However, there are undoubted signals of economic slowdown in the US. Furthermore, there was also a disappointing set of trade data out of China this morning that suggests a slower road to Chinese recovery too. For me, this adds up to a ranging oil price.
This is also reflected in the technical analysis too.
The chart shows that the upside has consistently been capped by resistance around $81.70/$85.90 for several months. However, there is also a basis of support around $83.65/$85.65.
So, basically a $20 range.
The RSI momentum indicator consistently bottoms around 30, and tails off around 65 (or a bit above). This tells me the market ranges as a consolidation range but with a slight negative bias.
On a near-term basis, it is interesting to see the oil price falling over this morning in the wake of the China trade data. This is coming around what is still a three-week downtrend. Reaction to mid-range resistance around $72.25/$74.00 will determine whether this is a mid-range selling opportunity or whether the rebound has legs to run towards the highs again.
US CPI and OPEC report need to be watched
There are a couple of factors on the immediate horizon this week that will play into near-term volatility. The US CPI inflation data tomorrow will certainly be worth keeping an eye on. The Fed is still very mindful of sticky inflation and any upside surprise would encourage the FOMC hawks to stand their ground. This would strengthen the USD but also hamper the outlook for oil demand.
The OPEC Monthly Oil Market Report (released on Thursday) is also important. The report lays out the outlook for demand and tends to be a drive of near-term volatility in oil too.
Oil is still key for oil stocks
Before I go, I thought I would just leave you with a chart that shows the three-month performance of oil and a few of the US oil majors.
The chart shows that the oil price remains a key driver of the share price performance of stocks such as Exxon Mobil, Chevron and ConocoPhillips. The April sell-off on oil coincided with the share prices falling, whilst the oil rebound since Friday is also helping a rally in the shares. Call the oil price right and you will get a strong gauge of where the oil majors are headed.
