Fundamental Weekly Crude Oil Price Forecast: Volatility Must Remain

Fundamental Weekly Crude Oil Price Forecast: Neutral

• JHere are several stories unfolding in the energy space that are expected to keep volatility high in energy markets, none of which are likely to find a permanent solution any time soon.
• Long net positioning in the oil futures market remains close to its annual low and its lowest level since August 2016.
• The IG Customer Opinion Index suggests thatcrude oil prices have a mixed commercial bias.

Energy Price Week in Review

A torrent of conflicting headlines and mixed economic data continues to wreak havoc on global energy markets. The sharp drop in natural gas prices in Europe – the Dutch TTF was down -38.05% on the week while UK natural gas fell -41.76% – helped dampen speculation about the imbalance between short-term supply and demand, whereby Brent and crude oil would be seen as substitutes in the face of exorbitant prices. Crude oil prices fell -6.65% while Brent oil prices fell -1.65%.

Supply and demand concerns shift

There remains a plethora of factors that fuel volatility in energy markets. The week started with news that countries in the European Union, especially Germany, are filling their gas stocks faster than expected ahead of the winter months. But with the G7 countries agreeing to an oil price cap against Russia as the next step in sanctions for invading Ukraine, Russia announced that Nordstream 1 would be offline indefinitely.

Elsewhere, the latest weekly data suggests that implicit demand for gasoline in the United States is falling, a sign that the Federal Reserve’s efforts to reduce aggregate demand within the economy are paying off.

Outside the Middle East, news reports continue to suggest that a new Iranian nuclear deal remains close. As a result, OPEC+ is likely to announce a production cut when it meets later this month to help reduce volatility in energy markets and ultimately support the costs. In Asia, China’s latest zero-COVID lockdowns suggest energy demand will remain depressed for the world’s second-largest economy.

Still, there are several stories unfolding in the energy space that should keep volatility high in energy markets, none of which are expected to find a permanent solution anytime soon.

Global Economic Calendar Week Ahead

The The first full week of September sees a more saturated economic calendar as summer unofficially draws to a close. As is the case every week, and especially lately, the mid-week energy inventories numbers should prove to be among the most impactful for crude oil prices – beyond today’s headlines. .

• On Tuesday, September 6, the Reserve Bank of Australia’s September rate decision will be announced at 4:30 GMT. The US non-manufacturing PMI for August is expected at 14 GMT.
• On Wednesday, September 7, the Australian Q2 22 GDP report will be released at 1:30 GMT. The final 2Q22 Eurozone GDP report will be released at 9 GMT. The Bank of Canada’s September rate decision will be announced at 14 GMT. The weekly US API crude oil inventory change data is due out at 8:30 p.m. GMT. The final Japanese Q2 22 GDP report will be released at 23:50 GMT.
• On Thursday, September 8, the August Mexican inflation report is due at 11 GMT. The European Central Bank’s September rate decision will be announced at 12:15 GMT, followed by ECB President Lagarde’s press conference at 12:45 GMT. Fed Chairman Powell will deliver a speech at 1:10 p.m. GMT. US EIA weekly energy inventories and production report will be released at 15 GMT.
• On Friday, September 9, the August Chinese Inflation Report will be released at 1:30 GMT. The August jobs report for Canada (employment change and unemployment rate) is due at 12:30 GMT.

CRUDE OIL PRICE VERSUS NET TOC NON-TRADE POSITIONING: DAILY TIMELINE (September 2020 to September 2022) (CHART 1)

Then a look positioning in the futures market. According to CFTC TOC data, for the week ended August 30, speculators decreases their Oil futures net long position at 278,457 contracts, down from 298,426 report-long vsoncontracts held the previous week. Net long positioning in the futures market remains close to its annual low and its lowest level since August 2016.

IG CUSTOMER SENTIMENT INDEX: CRUDE OIL PRICE FORECAST (September 2, 2022) (CHART 2)

Oil – US Crude: Retail trader data shows 79.03% of traders are net long with a ratio of long to short traders of 3.77 to 1. The number of net long traders is 6.41% lower than yesterday and 25.21% higher than last week. , while the number of net-short traders is 0.91% higher than yesterday and 37.49% lower than last week.

We generally take a contrarian view of crowd sentiment, and the fact that traders are net long suggests that US crude oil prices may continue to decline.

Positioning is less net-long than yesterday but net-long since last week. The combination of current sentiment and recent shifts gives us another mixed trading bias for US Oil and Crude.

— Written by Christopher Vecchio, CFA, Senior Strategist