I have been updating my readers on the technical pattern on oil. The energy sector is bullish and the technicals are indicating more upside. The stock markets are falling on fears of an inflation surprise uptick. Oil is the lifeblood of the economy and higher oil prices means higher transportation costs. Costs which will be passed onto the consumers resulting in higher prices.
I gave the breakout trigger and targets in mid August. Recently, I highlighted the news that production cuts from Russia and Saudi Arabia, or rather the extension of these production cuts until the end of the year, caused a pop in oil. However, the technical rally came way before this news even came out highlighting the power of the charts and how they can ‘predict’ the news. Not really a surprise given we live in a world where others may be privy to information and data beforehand.
In terms of fundamentals, this rise is due to the Saudi’s announcing they would extend their production cuts (1,000,000 bpd) until the end of the year and Russia announcing it would extend its export cuts of 300,000 barrels per day (bpd) for the same period. Both OPEC+ members claim this is to maintain the stability and balance in the oil markets. But many see this as a cash grab.
It should also be noted that Saudi Arabia alongside Iran and The United Arab Emirates are countries included in the list of nations that will be joining the BRICS alliance (Brazil, Russia, India, China and South Africa) in 2024. In recent months, the US has been dumping their emergency oil reserves to lower oil prices, however the Saudi’s responded with production cuts much to the annoyance of the US. The Americans have always seen the Saudis as allies, but recent actions point to a souring of this long lasting relationship. The inclusion of the Saudis into BRICS is seen by some as the Kingdom acknowledging the rise of China and potentially dropping the US Dollar for energy payments down the road. But others just see this as the Saudis wanting to play both sides (East and West).
Oil prices have broken out once again after a few days of ranging. The uptrend continues and West Texas appears ready to close above $90 in the next few days. Our first resistance target comes in around the $92.50 zone. Other traders are targeting the major psychological $100 zone as the next resistance target.
Oil broke out today on news of a tighter supply outlook due to OPEC stating that major economies were faring better than expected despite rising interest rates. If demand for oil is rising then the production cuts are leading to a tighter supply and hence higher oil prices. Many have looked at oil as a recession indicator but strong prices point to a robust economy.
The second way of looking at this is that perhaps the Fed and other central banks are not done with raising interest rates. To tame inflation, central banks need the economy to slow down because money velocity must drop. People are not hurting just yet which may mean more rate hikes are coming perhaps after a period of pause. Rising oil prices might even be the trigger with a surprise inflation uptick.
All the major US stock markets are at pivotal resistance points. Zones that must be broken, with a strong green candle close, to confirm the downtrend pressure is over and that the bulls have regained control over the bears. September historically is the worst month for stocks. The big catalyst is the Fed meeting next week on September 20th 2023. Currently, the markets expect no rate hike. But will Powell come out with a hawkish tone given the move in oil?
Maybe this rise in the US Dollar is hinting at the market beginning to price in a more hawkish Fed… or some say, more rate hikes. Bond yields are also remaining high and could breakout further. The dollar has climbed out of a recent downtrend and the new uptrend is about to test the 106 zone. A breakout would be bullish and could be due to a hawkish Fed.
I must also state that other factors could result in a stronger dollar. Fear perhaps stemming from other geopolitical factors.