What's Next for Brent After Dip?

Crude prices declined in August as tariffs took effect, production increased, and peace negotiations on Ukraine tentatively advanced, leaving traders wondering if it marked the start of a downtrend or if a bounce could be expected.

Key Developments in the Market

• IEA and OPEC+ disagree on demand projections, as US tariffs take effect with the expectation that the global economy will slow.
• Goldman Sachs expects crude prices to fall into the $50s based on IEA projections, and hedge funds have reduced their bullish bets on crude.
• Rising demand in China and protracted peace negotiations over Ukraine could support crude prices.

Multiple Sources of Downward Pressure

Crude prices started the month declining from a high as the long-awaited global tariffs imposed by the Trump Administration took effect. The increased trade friction is expected to weigh on the global economy and sap demand. A little later, the IEA published its monthly report, in which it said that it as OPEC+ unwinds its production curtailments. However, the oil cartel disagrees with that assessment. It predicts demand growth at a faster rate of 1.3 million barrels per day, compared to the 0.7 million barrels per day that the IEA expects. In any case, both outlooks assume Russia will still be hampered by sanctions. Recent progress towards peace in Ukraine has been accompanied by reports that Russia is seeking ways to reintroduce its oil to the formal market, including inviting US oil majors to resume investment in Russian assets.

Brent fell 2% to a weekly low on Tuesday as , following the failure to secure a deal between the two countries. The main sticking point appears to be India's refusal to halt its purchases of Russian oil, with US President Donald Trump doubling the tariff rate as part of a pressure campaign aimed at bringing Russia to the negotiating table. All told, Brent prices are 6% lower since the start of the month. Trump also praised the lower crude prices during an open Cabinet meeting on Tuesday, saying he expected prices to move lower soon.

More Declines or a Rebound?

Some analysts argue that the trend for crude will now be to the downside, with Goldman Sachs saying in a note to clients that it next year. The basis for the projection is the IEA's anticipated oversupply of 1.4 million barrels next year. Hedge funds have reduced their long positions in oil to the lowest level in 16 years, amid expectations that further sanctions on Russia will not be imposed. On the other hand, demand from the world's largest importer, China, has been picking up. The government recently that would offer subsidies on consumer loans in an effort to shore up the market. In a similar vein, crude last week, following a 6.0 million barrel decrease the week before. Whether the IEA or OPEC ends up being correct in their assessment may depend on how the global economy performs for the rest of the year.

Brent Bears Taking Back Momentum

Brent prices turned around this week, moving lower amid the prospect of Russian oil returning to the formal market. Last week's high of $68.50 per barrel is now resistance below the upper Bollinger band at $70.00, with a break above potentially eyeing the $73.00 level. RSI has fallen to 50, suggesting the bulls have become exhausted. Support can be found at the swing low of $65.00, along the lower 'autotrend' line, with a breakdown heading towards the May low at $62.00.

Source: SpreadEx | Brent, spot