Can Oil Sustain Its 10% July Upside?

Crude prices have had an upward trajectory this month, nearing a 10% gain mid-month, but entered some choppy waters with China data and worries about how far the Fed will go.

Maintaining the Trajectory

OPEC and the International Energy Agency (IEA) have forecasted increasing demand for crude for later this year and into 2024. The IEA, in particular, believes that demand will outstrip supply, pushing the price higher. However, this auspicious forecast relies on expectations that China's largest importer will increase demand. So, when China reported GDP below expectations for the second quarter, oil took a bit of a beating.

However, the price of crude recovered relatively quickly, with analysts saying it was likely due to the Chinese government announcing even more stimulus programs to support the economy. But the higher price trend continued through the week, which opens the possibility that investors are now looking in another direction for global demand. This came after the PBOC affirmed the loan prime rate, as investors are waiting for the Chinese government to announce further stimulus measures. One includes the central bank lowering borrowing costs, potentially bolstering industrial production, manufacturing and overall energy demand.

However, oil prices are influenced by a wide range of factors. The US has been reporting better-than-expected economic data over the last couple of weeks, as fewer and fewer investors believe the country will have a recession this year. Markets are pricing in the Fed raising rates one more time, ending the tightening program that could constrict economic activity, impacting demand.

There Are Also Some Technical Factors

Crude prices have also benefited from a weaker dollar following the release of slower-than-expected US CPI last week. Saudi Arabia and Russia also announced they would extend curbs on production for the rest of the year. And now, the US is reaching the point where it would be expected to start refilling its Strategic Petroleum Reserve (SPR). Last week was the first time there were no SPR releases in over three months. The first crude delivery is expected to start rebuilding the reserves in August.

While China is the largest importing country, the largest importing economy is the Eurozone. The latest data showed that the region just managed to escape a technical recession and is expected to experience more growth in the latter half of the year. The ECB is also approaching the end of its rate hiking cycle, with debate among policy board members about whether or not to continue tightening at the September meeting. Europe is also expected to face an energy crunch again in the winter and has increased buying to stock up ahead of the cold weather. Even if growth from China doesn't match the rosy projections, other economies could be turning the corner and supporting demand going forward. Though, as the regional banking saga showed back in March, there is always an opening for something unexpected.

WTI in Wedge Pattern?

After putting a low in on May 3, oil prices have begun an upward structure resembling an incomplete wedge pattern. The success of the formation will depend on whether we see a third peak above $77.20 per barrel after a second trough near the lower trendline. Wedges are typically followed by deep or shallow corrections, exposing supports at $70 and $66.50 per barrel.

If $74 holds firm in the short term, the pattern might complete near $80 per barrel but will be invalidated in an upward continuation past $84 per barrel (the second trough's length). Otherwise, losing the near support will expose $71.80 per barrel next.

Source: SpreadX / Light Crude

Key Takeaways

Crude oil prices have seen a ~10% increase in July, but uncertainties remain. While OPEC and the IEA predict rising demand for crude, concerns arise from China's dismal GDP growth. The recovery from this setback was attributed to the Chinese government announcing more stimulus programs, potentially boosting industrial production and energy demand. Additionally, positive economic data from the US, a weaker dollar, extended production curbs by Saudi Arabia and Russia, and the anticipated refill of the US SPR all contribute to the upward trend. Europe's potential economic growth and increased energy buying further support demand. However, various factors can still impact oil prices unexpectedly.