Oil Up Again As Fickle Traders Focus On Tight Supply, Not Rate Hikes

Meanwhile, Goldman sees Brent at $86 by year end: File Image/Pixabay

Oil trading started the week with an uncharacteristic bang on Monday, as traders again chose to focus on a tighter crude market instead of their concerns over bank rate hikes and boosted the commodity by 2 percent to a near three-month high.

Brent settled up $1.67, or 2.1 percent, to $82.74 per barrel (the highest close since April 19), while West Texas Intermediate settled up $1.67, or 2.1 percent, to $78.74 (the highest close since April 24), with both benchmarks pushed into overbought territory above their 200 day moving average.

Edward Moya, senior market analyst at OANDA, said in a note, "The rally in crude oil is impressive as it occurs as Europe is looking very weak right now, the U.S. is slowing down, and China's Politburo isn't expected to unveil major stimulus this week."

Indeed, the trading revealed more about the fickleness of investors than any economic/social driver: for example, they chose to downplay a report from S&P Global that business activity in the U.S. slowed to a five-month low in July due to declining service sector growth.

It was unclear whether this would deter the Federal Reserve from raising interest rates again on Wednesday, this time by an anticipated quarter percentage point, to between 5.25 and 5.5 percent.

It was also unclear whether banks overseas would reconsider hikes in the wake of S&P also reporting  that Euro zone business activity shrank far more than expected in July, as services industry demand declined and factory output fell at the fastest pace since the beginning of the pandemic.

Also supporting oil prices on Monday was an outage at Exxon's Baton Rouge refinery, due to a faulty gasoline-making catalytic cracker that may take several weeks to repair; Bloomberg noted that the disruption during the high-demand summer driving season "also boosted the 3-2-1 crack — a measure of the profitability of turning crude into fuel — to the highest since March."

In the near term, some experts think China will provide further impetus for prices rises: Rebecca Babin, a senior energy trader at CIBC Private Wealth, explained,  "Commentary out of China is disappointing to some markets, but the fact that we are seeing stimulus, if they do anything to support the economy, it's positive for crude because I don't think crude has priced in stimulus."

By far the most bullish analytical voice heard on Monday was that of Goldman Sachs, which expects record demand in oil markets to drive crude prices higher in the near term.

Daan Struyven, Goldman's head of oil research, told media, "We expect pretty sizable deficits in the second half with deficits of almost 2 million barrels per day in the third quarter as demand reaches an all-time high," and he added that he expects Brent to rise to $86 per barrel by year-end.