Oil prices tumbled to a five-week low on Tuesday, driven primarily by a wave of algorithmic selling that pushed the U.S. benchmark West Texas Intermediate (WTI) down by 1.6% to nearly $77 per barrel. This sharp decline followed the breach of critical technical levels, notably the 50-day and 100-day moving averages, which typically serve as support thresholds. The low liquidity typical of the summer months further exacerbated this downward trend.
The Brent crude benchmark also saw a significant drop, falling by 1.27% to $81.13 per barrel by 2 PM ET. Analysts are now watching closely as WTI approaches oversold territory, which could indicate a potential reversal. However, caution remains as market participants await the American Petroleum Institute's (API) weekly estimate on U.S. crude inventories, due later in the day, and the Energy Information Administration's (EIA) Weekly Petroleum Status Report, set for release on Wednesday.
Recent data from the API has shown a consistent decrease in U.S. crude stockpiles over the past three weeks, with a total drop of more than 15 million barrels, reaching the lowest levels since February. Despite the current downtrend, crude prices have been buoyed year-to-date by OPEC+ supply reductions and anticipations of lower U.S. interest rates, potentially as soon as September. Political uncertainties, including the attempted assassination of former President Donald Trump and President Joe Biden's decision to withdraw from the 2024 presidential race, have also played a role in oil price fluctuations.
The API's latest estimate, expected at 4:30 PM ET, is predicted to show a 700,000 barrel build in U.S. crude oil stocks. Such an increase would break the streak of inventory declines, potentially impacting market sentiment further.
Simultaneously, oil prices fell about 2% to a six-week low on expectations of a ceasefire in Gaza and growing concerns about demand in China. Brent futures settled at $81.01 a barrel, while WTI closed at $76.96. Both benchmarks entered technically oversold territory for the first time since early June.
The prospect of a ceasefire in Gaza has been bolstered by ongoing negotiations mediated by Egypt and Qatar, under a plan outlined by President Biden. Israeli Prime Minister Benjamin Netanyahu has suggested that a deal to secure the release of hostages held in Gaza could be imminent, even as conflict continues in the region.
The war in Gaza has lent support to oil futures, as investors priced in the risk of potential disruptions to global crude supply from the Middle East. Meanwhile, geopolitical tensions have heightened with recent Iran-backed Houthi attacks on commercial shipping and Israeli airstrikes in Yemen, escalating fears of a broader regional conflict.
In addition to these geopolitical factors, the strengthening U.S. dollar has exerted downward pressure on oil prices. A stronger dollar makes oil more expensive in other countries, potentially reducing demand. The dollar's recent rise to a nine-day high against a basket of other currencies has thus contributed to the decline in oil prices.
However, growing bets on interest rate cuts in September could provide some support to oil prices. Both the European Central Bank and the Federal Reserve are seen as likely to cut rates, which would lower borrowing costs and potentially boost oil demand. China's recent surprise move to cut major short and long-term interest rates for the first time since last August also signals an intent to boost growth in the world's second-largest economy, which could have positive implications for global oil demand.
