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Summary: Despite a significant unexpected decline in crude oil inventories, a shift in macro sentiment caused oil prices to retreat from their highs. With the upcoming OPEC+ meeting, market participants are closely watching for any anticipated discrepancies that could lead to changes in the market dynamics, prompting a short-term adjustment approach toward crude oil.

Fundamentals

Despite a large drop in U.S. crude oil inventories exceeding expectations as of July 28, crude oil prices still experienced a substantial decline. Specifically, the EIA inventory data showed a reduction of over 17 million barrels in crude oil stocks for the week ending July 28, the largest single-week decline in history, surpassing the expected decrease of 1.05 million barrels and the previous drop of 600,000 barrels.

On the macro front, the U.S. Treasury announced a quarterly refinancing plan on Wednesday, increasing the size of long-term bond sales, coupled with Fitch downgrading the U.S. credit rating, resulting in a collective plunge in risk assets. As the U.S. dollar continued to rise, oil prices came under pressure.

The OPEC+ meeting is approaching, and six OPEC+ sources indicated that it is unlikely to adjust production plans at a time when supply tightening and strong demand are driving oil price increases. This could be an opportunity for Saudi Arabia to extend its voluntary production cut of 1 million barrels per day for one more month.

Supply cuts have finally tightened the oil market, and it is expected that inventories will significantly decrease in the coming months. Additionally, with Russian exports declining, the impact of OPEC+'s production cuts is starting to show, and Saudi Arabia's cuts are evident in the decrease in inventories. Supply growth in other markets is also weakening, with limited room for export increases from Iran and Venezuela, while U.S. shale oil production is set to decline steadily amid declining drilling activities. Sustained price increases depend on a continuous improvement in demand, which currently seems to be the case.

Looking ahead to this week, the release of non-farm payroll data could also impact market sentiment and commodity prices, especially if the actual data significantly deviates from expectations. Investors expect the pace of hiring in July to slightly slow, but strong data could reinforce bets on a Fed rate hike and trigger risk-off sentiment amid heightened concerns about economic recession.

On the other hand, a reduction in job opportunities may dampen hopes for the Fed to take further tightening measures, which could favor risk assets like crude oil.

Technical Analysis

WTI crude oil experienced a significant sell-off during yesterday's trading session, but the price is still holding within the upward trend seen in July. If the support level holds, crude oil prices may recover toward the high of $82.50 or even higher.

The Fibonacci retracement tool shows that the 38.2% level aligns with the trendline support near $79.00. A more substantial correction could reach the 50% Fibonacci level at $78.00 or the 61.8% level at $77.00.

The 100 SMA is positioned above the 200 SMA, indicating the path of least resistance is to the upside, and support is more likely to hold than to be broken. Additionally, the gap between the moving averages is widening, reflecting increased bullish momentum.

The stochastic indicator has entered oversold territory, suggesting exhaustion among bears, hence the possibility of an uptrend as bulls regain control. Furthermore, the relative strength index (RSI) also appears ready to climb, indicating that if bullish pressure intensifies, the price is likely to follow suit. In terms of trading strategy, it is recommended to buy the dips.

Trading Recommendations

Trading Direction: Long

Entry Price: 79.00

Target Price: 82.50

Stop Loss: 75.80

Valid Until: 2023-08-17 23:55:00

Support: 78.50, 77.14, 76.38

Resistance: 79.71, 80.40, 81.72