WTI was trading around $68.65 on Friday, up 0.30% on the session, as a softer US Dollar followed weaker US jobs data. US Nonfarm Payrolls showed 57K jobs added in June versus expectations of 110K, a miss that damped assumptions about further Federal Reserve tightening and offered mechanical support to USD-priced commodities such as crude.<\/p>\n
Attention stayed on the Middle East as indirect US-Iran talks continued after discussions in Doha failed to secure a lasting deal, while Iran\u2019s joint military command warned of a \u201cdecisive and swift response\u201d to any US interference in the Strait of Hormuz. Commerzbank said the slide in oil has been driven by expectations of a future supply surplus rather than evidence of an already oversupplied market, and pointed to forthcoming Energy Information Administration forecasts alongside future OPEC+ production decisions as potential catalysts.<\/p>\n
We see the softer US jobs data as a significant tailwind for crude oil heading into the coming weeks. The weaker US Dollar makes oil cheaper for foreign buyers, and this mechanical effect should provide a solid floor for prices. Given the Federal Reserve is now less likely to tighten policy, this dollar weakness could persist.<\/p>\n
The latest inventory data from the Energy Information Administration (EIA) this past Wednesday supports this view, showing a surprise draw of 4.5 million barrels. This contradicts the market narrative of a brewing supply surplus that has weighed on prices recently. This indicates that current demand is much healthier than the market has been pricing in.<\/p>\n
Global demand signals also appear to be stabilizing, with the most recent global manufacturing PMI data for June ticking up to 50.8. This suggests industrial activity is in a slight expansion phase, easing concerns of a sharp economic slowdown that would hurt oil consumption. We believe the fears of a future supply glut have been overstated relative to the actual data.<\/p>\n
With the next OPEC+ meeting scheduled for the second week of July, we anticipate the cartel will be motivated to support prices after the recent decline. The current price level near $68 is well below the fiscal breakeven points for many key producers, including Saudi Arabia. We expect rhetoric from the meeting to be aimed at preventing further price drops, with a surprise production cut remaining a distinct possibility.<\/p>\n
The ongoing tensions in the Middle East, particularly concerning Iran and the Strait of Hormuz, are not fully priced into the market. This geopolitical risk represents a significant source of potential volatility and provides a reason to own upside exposure. We feel that derivative markets are underappreciating the chance of a supply disruption that could cause a rapid price spike.<\/p>\n
Historically, WTI prices in the high $60s have represented a strong support zone, especially when compared to the $80-$100 range seen in recent years. This suggests the market has over-corrected, presenting an opportunity for traders. We are positioning for a rebound by using options to gain upside exposure while clearly defining our risk.<\/p>\n\n\n\n