Oil Is Testing Panic Lows

Brent crude prices have recently fallen by 5.0%, reaching $76.25 per barrel, and nearly touching the panic low of $75.82 seen on August 5, following the release of weak U.S. labor market data and a sharp decline in carry trade from Japan. The current decline in oil prices is driven by similar factors, particularly the revision of Nonfarm Payrolls data released on Wednesday. This revision revealed that 818,000 jobs were removed from the official count of 2.9 million reported between April 2023 and March 2024, a significant adjustment not seen since the Great Financial Crisis of 2009. Despite this alarming development, Wall Street is advising calm, emphasizing that other macroeconomic indicators do not point to an imminent downturn but rather a cooling of the American economy.

The Federal Reserve is expected to play a crucial role in maintaining market stability ahead of the upcoming U.S. presidential election in November. The recent FOMC Minutes indicate that most policymakers favor a cut in interest rates in September. Investors are now looking to Fed Chair Jerome Powell for clarity during his speech at the Jackson Hole central bankers symposium on Friday. Powell is likely to confirm a 0.25 percentage point rate cut, which would demonstrate confidence in the resilience of the U.S. economy. However, if he suggests a more aggressive 0.50 percentage point cut, it could signal underlying economic weakness, potentially triggering a sell-off in risky assets. In such a scenario, Brent crude prices could fall further to the $69.00-71.00 per barrel range.

The more probable outcome is a modest rate cut, which could provide some support for risky assets. This view is bolstered by the United States Oil Fund (USO), which reported net inflows of $92.2 million this week, largely occurring when prices hit $78.00 on Monday. This suggests that large investors are positioning for a recovery in oil prices, expecting them to rise to at least $81.00-82.00 per barrel. Citigroup analysts also anticipate an increase in Brent prices to $80.00 due to potential hurricanes in the Gulf of Mexico and escalating geopolitical tensions in the Middle East, downplaying immediate risks of a further decline.

From a technical perspective, Brent prices could spike to $80.00-82.00 per barrel by the end of August. However, a period favorable for price declines is expected to begin in September and continue through October, during which prices could potentially fall below the $69.00-71.00 support level, reaching as low as $55.00-60.00 per barrel. Therefore, betting on a steady rise in oil prices at this time is risky.