Oil prices rebound

Oil prices have seen a slight rebound after three consecutive days of decline, yet they remain on track for a weekly loss. This shift comes as markets await a speech by Federal Reserve Chair Jay Powell, which is anticipated to provide insights into potential future U.S. rate hikes. West Texas Intermediate (WTI) crude is trading slightly higher at $79.05 per barrel, remaining below the critical $80 threshold for the second consecutive day. WTI has witnessed a decline of nearly 3% this week, following a 2.3% drop in the previous week. This drop followed a seven-week rally driven by production cuts from Saudi Arabia and Russia, boosting WTI prices by almost 20%.

Powell’s speech anticipations dampens sentiment

Anticipation of the hawkish tone in Powell’s upcoming speech at Jackson Hole is tempering oil sentiment. Market participants are preparing for potential implications on the dollar and Treasury yields as the Federal Reserve aims to curb inflation.

Economic indicators not encouraging

Global factory activity continues to be subdued, with Japan reporting a third consecutive month of shrinking factory activity. The eurozone is experiencing a steeper decline than expected, and the UK is anticipated to report weaker economic growth. In the U.S., business activity is slowing down, nearing a stagnation point in August, while the labor market remains tight despite the Federal Reserve’s aggressive rate hikes.

Supply dynamics and market factors

Saudi Arabia is likely to extend its production cut for a third consecutive month, with Russia making similar cuts. However, the initial price surge resulting from these cuts has been counteracted by rising global supply. U.S. oil production is at a three-year high, estimated at 12.8 million barrels per day, marking the highest level since the pre-pandemic period of March 2020. While U.S. crude stockpiles have declined by 6.135 million barrels, there has been an increase in fuel stockpiles. Gasoline inventories unexpectedly saw a build, and distillates rose more than forecast.

Global supply and sanctions

The global oil supply picture is evolving as Iran projects that its crude output will reach 3.4 million barrels per day by the end of September, despite ongoing U.S. sanctions. The U.S. is also considering the possibility of easing sanctions on Venezuela’s oil sector, contingent upon the nation’s progress toward a free and fair presidential election.

What we think

Oil prices have rebounded modestly after a series of declines, with market focus turning to the upcoming Powell speech and its potential impact on the U.S. dollar and Treasury yields. The supply dynamics, economic indicators, and geopolitical factors are all contributing to the volatility and uncertainty in the oil market.

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