Weekly Oil Market Summary: Time for a Breakout?

Brent closed at $108.18 on Friday, an increase of $2.64 from the previous Friday’s close of $105.54. This was despite concerns over whether the US fiscal cliff will be diverted, and means Brent crude has registered a fifth weekly gain since the beginning of November.

The first two days of the week saw oil move slight upwards on Tuesday as German consumer confidence increased to its highest level in seven months. However the momentum could not continue on Wednesday, and despite prices reaching $108.99 during trading, the market closed at $106.54 as increased US inventories indicated an increase of supply and provided fuel for the bears.

Thursday saw further downward price movements as concerns built over whether US political leaders will negotiate the fiscal cliff and prevent automatic spending cuts and tax increases coming in to force in January. 

The biggest daily rise and main component of the weekly gain came on Friday with the release of US industrial output and Chinese PMI data. Industrial output in the US was seen to have increased 1.1% in November on the back of rebuilding after Hurricane Sandy, while the Chinese PMI number came in greater than expected at 50.9. While the rebound in US industrial output could be temporary, these two key indicators nevertheless gave short-term support for the oil price, and offset loses seen after the increased US inventories reported on Wednesday.

The coming week

Without an extension of the current spending and tax profile, the macroeconomic outlook for the world's largest economy, and therefore oil prices, is certainly to the downside. Market participants will therefore continue to watch US budget discussions over the coming week; news suggests that republicans are discussing a back-up plan that would at least cancel some tax rises and therefore be more supportive for oil prices than nothing at all. Because of this massive unknown hanging over the market, it is unlikely that other economic events will cause prices to break out of the recently traded range of $105-$110. In fact, as a quick glance over the chart below shows, prices have been fluctuating over a narrower range over the past week, possibly in anticipation of a market breakout. Whether this breakout will be positive or negative remains to be seen, but with the US economy rapidly heading toward the fiscal cliff, there remains significant downside risk on the horizon. With this being the last full week of trading before the holidays, we may also see a price fall toward the end of the week as traders close out positions before the holidays.