Forex Analysis & Reviews: 04.11.2024

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04.11.2024 01:03 AM

Oil Doesn't Trust Reconnaissance

While Israel and Iran remain in a quasi-choreographed dance, trying to display aggression without triggering full-scale war, oil prices are finding support. Fundamentally, the oil market remains weak; however, periodic escalations in geopolitical tensions bring the knocked-down Brent back to life.

After Israel struck Iranian military targets in retaliation for a massive missile attack, the situation in the Middle East appeared to stabilize. There was no outraged rhetoric from the affected side, but the calm can be deceptive. Reports referencing Israeli intelligence surfaced in the press, indicating that Tehran is preparing a new attack. This information pushed Brent close to $75 per barrel.

Unfortunately, without geopolitics, the North Sea benchmark is unlikely to hold above $70 per barrel. According to Bloomberg, OPEC+ oil production in October increased by 370,000 barrels per day, mainly due to Libya's return to production. Starting in December, the Alliance plans to add another 180,000 barrels per day, which, combined with increased supply from other countries, pushes the oil market towards a surplus.

U.S. Economic Sector Productivity Trends

It is well known that the U.S. economy leads globally due to accelerated productivity growth. Although the topic of artificial intelligence has become a cliche, it is notable that productivity in the oil industry surpasses that in the IT sector. This enables leading American companies Exxon Mobil and Chevron to report record production levels in their third-quarter reports. Based on these figures, Macquarie lowered its forecast for the North Sea benchmark for the fourth quarter from $73 to $70 per barrel.

The U.S. benefits from the OPEC+ agreement to cut production, capturing its market share. Concerns over a U.S. economic slowdown exert pressure on Brent just as much as the news of record production volumes. The modest non-farm payroll growth of 12,000, compared to Bloomberg's consensus forecast of 113,000, signals a slowdown in GDP and oil demand.

Investor reactions to the U.S. labor market report suggest that data skewed by hurricanes and strikes is unlikely to accelerate or delay the Federal Reserve's monetary easing cycle. This should not intimidate the oil market either.

Thus, without the geopolitical factor, the oil market remains weak. Supply is ready to increase, while demand leaves much to be desired.

On the daily chart, Brent saw the bulls attempt to break above resistance levels through fair value and a cluster of moving averages. The failure of this attempt indicates buyer weakness and suggests the potential for selling if support at $72.65 per barrel is successfully tested.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.