Large Investors Bet on Oil Recovery

Brent crude prices have dropped 4.9% to $73.77 per barrel this week, though they briefly dipped to $72.90 on Wednesday, marking the lowest level since December 13, 2023, and approaching the key support range of $70.00-$72.00 per barrel. This area could offer a solid base for recovery.

Investors are increasingly worried about a potential recession in the U.S., and a disappointing August labour market report drove Brent prices down to $75.70 per barrel. Despite efforts to calm the market, including rumours that OPEC+ might delay its planned production increase for October 1, oil prices continued to slide. Brent hit resistance at $80.00-$82.00 per barrel in late August and has been in decline ever since. Only positive U.S. labour market data could potentially halt this downward trend. Conversely, any negative news on the U.S. economy could push oil prices to new lows.

The recent Manufacturing PMI report, which showed U.S. industrial contraction for the fifth consecutive month, contributed to Brent's 4.9% single-day decline, the sharpest drop since October 4, 2023. The next day saw prices slip another 1.2% following weak JOLTs Job Openings data, which hit a 42-month low at 7.673 million.

However, large investors remain optimistic, attempting to buy the dip. Two weeks ago, when Brent was at $78.00 per barrel, they opened new long positions, targeting $81.00-$82.00, and invested $158.6 million into the United States Oil Fund (USO). This week, they added $252.8 million, the largest net inflow since April, with much of the investment occurring when prices dipped to $74.00 per barrel. If these investors are expecting a standard 4-5% rebound, Brent could rise to $77.00-$78.00 per barrel. Still, there is a possibility that prices could first hit the support at $70.00-$72.00 before recovering.

The most likely scenario hinges on the upcoming Nonfarm Payrolls report for August. If the data meets or exceeds Wall Street expectations, recession fears could ease, potentially pushing Brent prices up to $77.00-$78.00 per barrel.