Oil market outlook: Impact of production cuts and economic indicators on price trends
Oil prices are set to continue their upward trajectory, marking their sixth consecutive week of gains. This comes after Saudi Arabia and Russia, two of the world’s largest crude producers, pledged to reduce output through the next month. Brent crude futures for October rose slightly to $85.24 a barrel, while U.S. West Texas Intermediate crude for September increased to $81.72.
Saudi Arabia’s decision to extend a voluntary oil production cut of 1 million barrels per day (bpd) until the end of September, coupled with Russia’s commitment to slash its oil exports by 300,000 bpd in the same month, have raised supply concerns and supported prices.
Despite these cuts, the Joint Ministerial Monitoring Committee of OPEC+ is not expected to alter the overall oil output policy in their meeting today. The U.S., the world’s largest oil producer and consumer, has stated its intention to work with producers and consumers to ensure the energy market promotes growth.
However, recent U.S. data indicating tight labor markets and a slowing service sector have sparked concerns about a potential economic slowdown, which could dampen demand for oil and exert downward pressure on prices. The strength of the dollar and the possibility of the Federal Reserve tightening policy further due to a heated labor market have also weighed on crude prices.
In Europe, the downturn in business activity in July was worse than initially anticipated, and the Bank of England’s decision to raise its interest rate to a 15-year peak could increase borrowing costs for businesses and consumers, potentially slowing economic growth and reducing oil demand.
Despite these potential headwinds, the outlook for oil markets remains positive. An improved demand outlook and tight supply could continue to support oil prices. The upcoming U.S. non-farm payroll data will be a key focus and could steer market sentiment.
Investors should monitor the OPEC+ meeting and the U.S. non-farm payroll data closely. Any signs of a stronger-than-expected labor market could lead to speculation about further tightening of monetary policy by the Fed, which could strengthen the dollar and weigh on oil prices. Conversely, any signs of a weaker labor market could lead to a softer dollar, supporting oil prices.
In summary, while there are some concerns about potential headwinds, the overall outlook for oil markets remains positive due to supply cuts and an improved demand outlook.
Events of the day
The economic calendar for today is packed with significant data releases from Europe, the UK, and North America. The key focus will be on the US Nonfarm Payrolls data, which is expected to show a slight decrease from the previous month.
Starting with Europe, German Factory Orders are expected to contract by 2.0% MoM in June after a strong 6.4% growth in May. This could potentially weigh on the Euro. French Non-Farm Payrolls for Q2 and Eurozone Retail Sales for June are also due, which might provide further direction to the EUR.
In the UK, the S&P Global / CIPS UK Construction PMI is forecasted to drop slightly to 48.0 in July from 48.9 in June, indicating a contraction in the sector. This could put some pressure on the GBP. Also, comments from BoE MPC Member Pill will be closely watched for any hints on future monetary policy.
In North America, the spotlight will be on the US labor market data. The Nonfarm Payrolls for July are expected to come in at 200K, slightly lower than the 209K in June. The Unemployment Rate and Participation Rate are both expected to remain steady at 3.6% and 62.6% respectively. Average Hourly Earnings are forecasted to slow down both on a monthly and yearly basis.
The Nonfarm Payrolls report is a key indicator of the health of the US economy and can significantly impact the USD. A higher-than-expected reading should be taken as positive/bullish for the USD, while a lower-than-expected reading should be taken as negative/bearish.
In Canada, the Employment Change for July is expected to decrease significantly, which could impact the CAD. The Ivey PMI for July is also due later in the day.
1. EUR/USD: Watch for the German Factory Orders and Retail Sales data. A weaker than expected data could push the pair lower.
2. GBP/USD: The Construction PMI data and comments from BoE MPC Member Pill could cause volatility. A weaker PMI could push the pair lower.
3. USD/CAD: The focus will be on the US Nonfarm Payrolls and Canadian Employment Change data. A stronger than expected NFP could push the pair higher, while a weaker Employment Change could push it lower.
4. Gold: Gold prices often move inversely to the USD. A stronger NFP could push gold prices lower.
5. Oil: Watch for the Baker Hughes Rig Count. An increase in the count could indicate increased supply, potentially pushing oil prices lower.
Remember, economic indicators can cause significant volatility, and it’s important to manage risk appropriately when trading around these events.