Brent: Bulls fight back ahead of US CPI data

• Brent ↓ 8% month-to-date

• US CPI & EIA report could spark volatility

• Over past year US CPI triggered of ↑ 0.7% & ↓ 1.1%

• Prices heavily bearish but RSI oversold

• Key technical level - $70

In case you missed it, oil tumbled over 4% yesterday after OPEC+ lowered global demand forecasts for this year and 2025!

Although prices rebounded on Wednesday thanks to a drop in U.S crude inventories and concerns about Hurricane Francine, the path of least resistance points south.

This can be reflected on the weekly charts with Brent down roughly 8% since the start of September.

After tumbling to levels not seen since December 2021, further losses could be fuelled by concerns over slowing growth in the United States and China. Fears around oversupply down the road may keep bears in the game, especially if OPEC+ moves ahead to hike production after the two-month delay.  

Watch this space because oil could be injected with fresh volatility today. 

The incoming US CPI report and Energy Information Agency (EIA) data will be in focus.

As highlighted in our week ahead report, the US August CPI has the potential to influence bets around future Fed rate cuts. More signs of cooling price pressure are likely to boost expectations around deeper cuts down the road.

Traders are currently pricing in a 30% probability of a 25-basis point Fed cut this month with a 93% probability of a 50-basis point cut in November.

Note: Lower interest rates could stimulate economic growth, which fuels oil demand. Lower interest rates may also lead to a weaker dollar, which boosts oil which is priced in dollars.

• Oil prices may push higher if a soft US inflation report fuels rate cut bets and weakens the dollar.

• A hot US CPI report that cools bets around lower rates and strengthens the dollar could drag oil prices lower.

Golden nugget: Over the past year, the US CPI report has triggered upside moves of as much as 0.7% or declines of 1.1% in a 6-hour window post-release.

A few hours after the US CPI data, the latest EIA report will be published.

It is worth noting that Crude oil inventories experienced a significant decline in the last week of August, falling by 6.9 million barrels.

• Another decline in US crude oil inventories may brighten the demand outlook, supporting oil prices.

• A build in US inventories could fuel fears around demand, dragging prices lower as a result.

Technical outlook…

Prices are under intense pressure on the daily charts with Brent respecting a bearish channel.

There have been consistently lower lows and lower highs while the MACD trades to the downside. However, the Relative Strength Index (RSI) is touching 30, indicating that Brent may be oversold.

While this has the potential to trigger a technical rebound, the fundamentals could limit upside gains.

• Sustained weakness below $70 could send prices back toward $68.49 and the levels not seen since August 2021 at $64.80.

• Should $70 prove reliable support, this could trigger a rebound toward $72.50 and $75.20.