Oil Prices Weighed by Chinese PMI Contraction & Russia-Saudi Arabia Divergence

  • USOil
    (${instrument.percentChange}%)

USOIL Analysis

April's economic indicators had cast doubt over the recovery of the world's biggest oil importer and the first major data point for May aggravated those worries, as factory activity contracted again. Today's release showed that the Manufacturing PMI fell to 48.8, deeper into contraction territory and the lowest since December.

Meanwhile, rifts between Russia and Saudi Arabia have appeared recently, ahead of Sunday's OPEC+ meeting. The two major oil producers are cooperating in what is known as OPEC+ and various members of the group had announced extra oil production cuts recently, on top of previously agreed reductions. [1]

The Saudi Energy Minister had cautioned speculators last week that "they will be ouching" and warned them to "watch out", in a hint of potentially further production cuts. [2]. Shortly after though, Russian President Putin noted that energy "prices are becoming economically substantiated" [3]. Deputy Prime Minister Novak doubled down, telling Russian media according to Reuters that "I don't think that there will be any new steps". [4]

Markets also monitor the US debt ceiling saga, as both chambers of Congress need to vote on the agreement, while Friday's Jobs Report is also important. Last week's hot PCE inflation report strengthened the hawkish repricing around the Fed policy outlook, with CME's FedWatch Tool assigning the highest probability to another 0.25% rate hike in June [5]. This has been a source of strength for USDOLLAR, which puts downward pressure to oil prices.

USOil rejected a critical confluence of resistances during his two-week rebound, slumping below $70.00 during the current one, due to Fed repricing, fears over China's recovery and the Saudi-Russian verbal divergence. This keeps risk for new 2023 lows in play (63.63), but we remain cautious for sustained weakness at that region.

On the other hand, the Relative Strength Index (RSI) points to the most oversold levels since the 2023 lows, while the existing production cuts are expected to lead to a tighter oil market. As such, another push to the critical 73.40-74.74 would be reasonable, although USOil does not inspire confidence for a bigger advance above the daily Ichimokou Cloud.

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Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 31 May 2023 https://www.opec.org/opec_web/en/press_room/7120.htm

2

Retrieved 31 May 2023 https://www.youtube.com/watch

3

Retrieved 31 May 2023 http://www.en.kremlin.ru/events/president/news/71198

4

Retrieved 31 May 2023 https://www.reuters.com/world/europe/russias-novak-does-not-expect-new-steps-opec-meeting-2023-05-25/

5

Retrieved 20 Jun 2024 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

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