By Alex Kimani
About a week ago, President Joe Biden made a highly unusual move by reaching out to OPEC, urging the cartel to increase oil production in a bid to tame rising gasoline levels for the U.S. consumer. Ostensibly, Biden feels that high oil prices will hold back the economic recovery amid the ongoing pandemic, though a more subtle reason could be the fact that gas prices tend to have a huge impact on the American psyche and could jeopardize the Democrats’ future political ambitions.
Well, it appears that Biden could get his wish despite OPEC declining his offer thanks to a peculiar ‘skimming stones’ cycle that has taken hold of the oil markets.
Crude prices fell for a sixth consecutive day on Thursday, with WTI and Brent dropping to $63.23/bbl and $66.19/bbl, respectively, its lowest since May, pressured by concerns about weakening demand due to a surge in the COVID-19 delta variant, a brawny U.S. dollar and a surprise increase in U.S. gasoline inventories.
Standard Chartered Global Research has described the current oil price cycle as a ‘skimming stones’ period of trading.
The research outfit notes that the broad pattern over the past three months has been one of sub-cycles of rallies from starting points below USD 68/bbl for Brent, followed by
reversals. Unfortunately for the bulls, the cycles have been getting flatter and faster, with Stanchart saying the next move is likely to be to the downside.
Skimming Stones Cycle
According to Stanchart, the first skimming stones sub-cycle started in late May, culminating in a Brent high of $77.84/bbl six weeks later. The next sub-cycle started below $68/bbl on 20 July with a high of $76.38/bbl two weeks later.
The latest and current sub-cycle started on 9 August with a high of $71.90/bbl reached just three days later.
On the charts, this pattern looks like skimming stones with each bounce less high than the previous one and the length between bounces gradually diminishing.
Stanchart has predicted that the end of the skimming stones phase will involve a period of
consolidation followed by a breakout move towards the downside.
The research firm notes that the recent crude oil trading has not been range-bound, with zero inside days recorded for Brent since July 2. An inside day is a trading day whereby an intra-day high lower than the previous day’s high as well as an intra-day low higher than the previous day’s low are recorded. Indeed, only three such days have been recorded over the previous 4-month stretch, a sharp contrast to the more volatile trading period of late-March and early-April when there were seven inside days in just 17 trading days.
Stanchart says that whereas the possibility of the oil markets returning to range-bound conditions remains, the current momentum in fundamentals, particularly the surge on the spread of the delta variant makes an eventual downside breakout more likely.
Wall Street is Wrong
Recently, we reported that Wall Street remains largely bullish on the oil price trajectory despite the pandemic and uninspiring near-term demand outlook.
Indeed, Goldman Sachs has slightly downgraded its oil price outlook to $75/bbl in the summer, down from its previous outlook of $80/bbl, while Bank of America commodities strategist Francisco Blanch says he sees a case for $100 a barrel oil in 2022 as the world begins facing an oil supply crunch.
However, the Stanchart researchers have strongly refuted those bullish positions saying that Brent price of $65/bbl or lower is more likely than $75/bbl or higher. Stanchart says its bearish view is informed by the fact that “…a significant amount of money has already
entered the market in the Wall Street-generated belief (mistaken according to our
analysis) that the balances are much tighter and justify USD 80-100/bbl.”
At this point, we advise the bulls to temper expectations not so much due to the fundamentals in the oil markets but due to an increasingly brawnish dollar and the fact that this market is largely being driven by the binary risk-on/risk-off trade.
The dollar has lately hit a nine-month high, weighing heavily on dollar-priced commodities, including oil, due to a surge on safehaven demand. The dollar’s multi-faceted strengths have been on display once again following the release of weak U.S. retail sales data that underwhelmed against consensus estimates; Yet, the greenback has been gaining ground against its international peers due to expectations of the Fed to begin its taper program in September while also drawing support from risks to global growth stemming the uncertain outlooks for China and the global economy.