Oil Prices Ramp Up, But Analysts Warn Of Bearish Trading Ahead

Economic fears continue to dominate investment strategies: File Image/Pixabay

A delayed response to supply cuts announced by Saudi Arabia and Russia on Monday was said  to be the main reason oil prices rose almost 3 percent on Wednesday – although the market continues to send bearish signals to traders.

West Texas Intermediate rose $2, or 2.9 percent, to settle at $71.79 per barrel, while Brent rose 40 cents, or 0.5 percent, to settle at $76.65 per barrel.

Although the Saudi/Russian cutback pledges were viewed in a generally positive light, the energy minister for the United Arab Emirates rained on the reduction parade somewhat by stating that the UAE wouldn't follow suit.

Also, Morgan Stanley responded to the cuts by reducing its fourth-quarter forecast for Brent to $70 per barrel from $75; analysts including Martijn Rats and Charlotte Firkins wrote in a note, "We still model stock draws in 3Q but expect oil price softness to continue as the market's focus shifts to 1H24 when balances look in surplus."

Meanwhile, a somewhat more optimistic Daniel Ghali, a commodity strategist at TD Securities, noted that Brent's prompt spread is back in a bullish, backwardated structure as traders reprice their expectations for near-term inventory draws.

He said, "Speculative short covering has likely provided some support to prices, but fundamentally our gauge of supply risk is printing its highest levels year-to-date; Saudi Arabia's decision to rollover its voluntary production cuts and Russia's decision to curtail exports, as opposed to production, are the fundamental factors contributing to recent gains."

However, despite pockets of optimism and Brent's prompt spread, the oil market remains steeped in bearish sentiment, stoked earlier in the session by the U.S. Institute of Supply Management (ISM) reporting that the U.S. is now on an 8-month contractionary period in the manufacturing sector as ISM data continues to languish below the 50 mark.

Zain Vawda, analyst at DailyFX, laid out the likely scenario for trading in the near future by remarking  that "As the global economy shows signs of a slowdown global central banks are expected to continue their hiking cycles, with market participants largely adopting a cautious approach in regard to oil in particular."