Crude oil could bounce back next week

Both the major crude oil contracts have sold off again and are set to close sharply lower for a third week running. Oil prices have been driven lower as the conflicts in Iraq have not had any actual impact on supply, while in Libya the government has resumed control of two major oil terminals that were occupied by the rebels for several months. Although it would take time for Libya to ramp up production and the possibility of further unrest in the Middle East and North Africa regions are there, speculators are selling now and asking questions later – just like they bought when the crisis was first unfolding. Therefore, there is the possibility that the selling may have been overdone and that some gains could be on the way, perhaps as early as next week.

Next week the focus may turn to demand side of things as we have important data coming up, especially from China where the second quarter GDP estimate and the latest industrial production number could help provide some clues about consumption. Meanwhile, some of the leading oil watchdogs have predicted that growth in oil demand would accelerate next year. While the OPEC expects global oil demand would rise by 1.21 million barrels per day (mb/d), the International Energy Agency (IEA) thinks it would actually be 1.4 mb/d in 2015. Both groups think non-OECD countries would drive growth in demand. In terms of supply, both see continued growth in non-OPEC production at rates of 1.31 mb/d and 1.2 mb/d, respectively. If they are correct, the rate of supply growth would be weaker compared to 2013 and 2014. In theory this should help to drive oil prices higher especially as supply side risks are still high.

Brent is heading towards a long-term bullish trend line which comes in around $106.50. If it breaks below here then a move towards $104.00 and possibly $100.00 could be on the cards over the coming weeks. WTI has broken its own trend, albeit a much short-term one, and is continuing to head lower. As things stand, the next stop could well be around the 200-day average at $99.75.