Oil Prices Are Likely to Continue Down

Brent crude prices have risen by 0.4% this week, reaching $78.00 per barrel, though they have slightly retreated from the $79.48 per barrel mark recorded on August 7. The recent drop below the crucial support level of $79.00-81.00 per barrel last Friday, spurred by a weak U.S. labor market report for July, has heightened the risk of further declines, with prices potentially dropping to $69.00-71.00 per barrel. Although prices are attempting to retest the former support at $79.00, they are currently struggling, retreating to $78.00.

Despite these challenges, large investors are capitalizing on price dips, betting on a recovery in crude prices. The United States Oil Fund (USO) reported net inflows of $145.8 million this week, a significant increase from $16.4 million last week, marking the largest inflow since mid-April. Most of these inflows occurred on Monday, helping prices recover by 4.0-5.0%.

However, the rising risk of a U.S. recession is prompting some to close long positions, as the demand for oil appears to be declining. On the other hand, elevated geopolitical tensions in the Middle East are providing some support for prices. Should these tensions escalate into a full-scale conflict, Brent prices could potentially surge above $81.00 per barrel.

Supporting this bullish sentiment, the U.S. Energy Information Administration reported a decline in oil inventories by 3.43 million barrels, compared to the expected 1.60 million, marking the sixth consecutive week of declining inventories. Additionally, Libya’s National Oil Corporation declared force majeure on all crude loadings from the Sharara oil field due to a strike by residents, further contributing to a 2.8% price increase.

Despite these supportive factors, recession fears remain dominant, likely preventing Brent prices from rising above $81.00. The geopolitical situation, particularly regarding potential Iranian retaliation against Israel, adds further uncertainty. While a full-scale attack by Iran seems possible, ongoing diplomatic efforts by the U.S., China, Russia, and other nations might prevent such an escalation. If these diplomatic efforts succeed, Brent prices could continue to decline towards $70.00 per barrel.