USOIL – RENEWED INFLATION FEARS?

At the beginning of July, we provided our students with an outlook on Oil & the transitory inflation stance. With the FED continuously stating that inflation is transitory, we expected a cool down in oil prices. The OPEC discussing increases in oil supply issuance set the stage for a pullback.

6 JULY FORECAST

Since then, we’ve seen a +-16% decline in oil prices. In August, we saw Biden requesting an increase in oil production from OPEC, to counter rising gasoline prices. This saw massive push back from 24 Republican senators on the controversial discussion, as Biden asks other countries to increase production while the administration is asking American oil companies (under tight environmental restrictions) to do less.

USOIL MONTHLY

Taking a look at the oil monthly on a logarithmic chart, we see a major trend line test originating from 2008.

Crude oil inventories is set to release at 4:30pm SAST. It will be interesting to see if supply increases similar to what we saw at the beginning of the month.

AUGUST US CRUDE OIL INVENTORIES DATA

Staying on the inflation narrative, many investors have been monitoring the 10 year bond yields, following inflation expectations. An interesting point to observe is that Oil followed the US10Y, however lagging by a few months. Once the 10Y broke structure below 1.40, we saw outflows simultaneously from Oil, forming a peak.

USOIL SIDE BY SIDE WITH US10Y

The 10Y yields peaked on the 30th of March whereas Oil peaked on the 6th of July. My thought process around this is that as yields continued to rise, investors built up more fear around sticky inflation, seeing a rotation of capital into Oil. Once we broke structure on yields, capital outflows were observed.

Starting the week, oil has had a strong bounce, now sitting at last week’s open, as well as US10Y formed a rounded bottom, seeing a 3.8% rise this week. Above 1.40%, anticipate further inflation fears to mount. Below 1.20%, anticipate a drop towards 1.10%.

USOIL DAILY

Looking back at the daily timeframe, we can see the significant support found at $62. Currently we are floating around the 78.6% fibonacci as well as March highs. Should we close above $68, I anticipate $69.50 to be breached, breaking structure to the upside towards $71.50. The higher low could be in, however an old saying goes “Never buy the first bounce” – I will be looking for clearer price action to confirm the switch back to bullish, $55 is not off the cards just yet. I personally, am leaning towards further downside.

Apart from the US oil inventories today & the decision of OPEC increasing supply issuance, the House passed a $3.5T budget bill in a 220-212 vote as well as an advanced $1T infrastructure bill. It is key to note that these figures will likely change as the GOP argue this would increase inflation while the White House disputes this.

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