Weekly Fundamental Crude Oil Price Forecast: Volatility to Remain

WEEKLY FUNDAMENTAL CRUDE OIL PRICE FORECAST: NEUTRAL

• Weekly Fundamental Oil Price: There are several stories unfolding in the energy space that should keep volatility elevated across energy markets, none of which are likely to find any permanent resolution anytime soon.
• Net-long positioning in the oil futures market remains near its yearly low, and its lowest level since August 2016.
• The IG Client Sentiment Index suggests thatcrude oil prices have a mixed trading bias.

ENERGY PRICES WEEK IN REVIEW

A torrent of conflicting headlines and mixed economic data continue to wreak havoc on global energy markets. The sharp decline in European natural gas prices – Dutch TTF was down -38.05% on the week while UK nat gas fell by -41.76% – helped alleviate speculation around short-term supply-demand imbalance, whereby Brent and crude oil would be seen as substitutes in the face of exorbitant prices. Crude oil prices dropped by -6.65% while Brent oil prices slipped -1.65%.

SUPPLY AND DEMAND CONCERNS SEESAW

Weekly Fundamental Oil Price: There remain a plethora of factors that are feeding into volatility across energy markets. The week started with news that European Union countries, especially Germany, are refilling their gas inventories quicker than expected ahead of the winter months. But with G7 countries agreeing to an oil price cap against Russia as the next step in sanctions for the invasion of Ukraine, Russia announced that Nordstream 1 would be offline indefinitely.

Elsewhere, the latest weekly data suggested that implied gasoline demand in the United States is falling, a sign that the Federal Reserve’s efforts to tamp down aggregate demand within the economy are working.

Out of the Middle East, news reports continue to suggest that a new Iranian nuclear deal remains close. Accordingly, OPEC+ remains likely to announce a production cut when it meets later this month as a way to help reduce volatility across energy markets – and ultimately prop up prices. In Asia, China’s latest zero-COVID lockdowns are leading to speculation that energy demand will remain depressed for the world’s second largest economy.

It remains the case that there are several stories unfolding in the energy space that should keep volatility elevated across energy markets, none of which are likely to find any permanent resolution anytime soon.

GLOBAL ECONOMIC CALENDAR WEEK AHEAD

The first full week of September sees a more saturated economic calendar as the summer unofficially comes to an end. As is the case every week, and particularly of recent, mid-week energy inventories figures should prove among the most impactful for crude oil prices – beyond the headlines du jour.

• On Tuesday, September 6, the September Reserve Bank of Australia rate decision will be announced at 4:30 GMT. The August US non-manufacturing PMI is due at 14 GMT.
• On Wednesday, September 7, the 2Q’22 Australia GDP report will be published at 1:30 GMT. The final 2Q’22 Euroarea GDP report will be released at 9 GMT. The September Bank of Canada rate decision will be announced at 14 GMT. The weekly US API crude oil stock change data are due out at 20:30 GMT. The final 2Q’22 Japan GDP report will be published at 23:50 GMT.
• On Thursday, September 8, August Mexican inflation report is due at 11 GMT. The September European Central Bank rate decision will be announced at 12:15 GMT, followed by ECB President Lagarde’s press conference at 12:45 GMT. Fed Chair Powell will give a speech at 13:10 GMT. The weekly US EIA energy inventories and production report will be released at 15 GMT.
• On Friday, September 9, the August Chinese inflation report will be published at 1:30 GMT. The August Canada jobs report (employment change and unemployment rate) is due at 12:30 GMT.

CRUDE OIL PRICE VERSUS COT NET NON-COMMERCIAL POSITIONING: DAILY TIMEFRAME (SEPTEMBER 2020 TO SEPTEMBER 2022) (CHART 1)

Next, a look at positioning in the futures market. According to the CFTC’s COT data, for the week ended August 30, speculators decreased their net-long oil futures position to 278,457 contracts, down from the 298,426 net-long contracts held in the week prior. Net-long positioning in the futures market remains near its yearly low, and its lowest level since August 2016.

IG CLIENT 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 the ratio of traders long to short at 3.77 to 1. The number of traders net-long is 6.41% lower than yesterday and 25.21% higher from last week, while the number of traders net-short is 0.91% higher than yesterday and 37.49% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Oil – US Crude prices may continue to fall.

Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Oil – US Crude trading bias.