Commodities Corner: No August swoon for oil prices. Here’s why crude bounced back.

Bets that Saudi Arabia will extend its voluntary production cut into October, as well as reports that Russia will announce details of a deal with OPEC+ to reduce oil supplies have helped the market “lean bullish into the end of the month,” said Denton Cinquegrana, chief oil analyst at the Oil Price Information Service (OPIS), a Dow Jones company.

Bloomberg reported Wednesday that its survey showed 20 of 25 of analysts and traders predict Saudi Arabia will extend its voluntary 1 million-barrel production cut into October.

Meanwhile, Deputy Prime Minister Alexander Novak told President Vladimir Putin Thursday that Russia will announce details of an agreement with OPEC+, which comprises the Organization of the Petroleum Exporting Countries and their allies, to reduce the supplies of oil, according to a report from Reuters.

On Thursday, West Texas Intermediate crude for October delivery
CLV23,
+2.39%

CL.1,
+2.39%
tallied a gain of $2, or nearly 2.5%, to settle at $83.63 a barrel on the New York Mercantile Exchange. The day’s rise prompted the U.S. benchmark to post a gain for the month, up 2.2% in August.

Global benchmark Brent crude, meanwhile, saw its October contract
BRNV23,
+1.13%

BRN00,
-0.01%,
which expired at the end of the session, end the month 1.5% higher, at $86.86 a barrel on ICE Futures Europe.

A turnaround for prices

Prices have bounced back from the August lows. WTI crude had settled as low as $78.89 on Aug. 23, a four-week low, while Brent posted a settlement as low as $83.21 on Aug. 23, its lowest in three weeks.

This year, the energy sector has lagged behind other asset classes in regard to percentage returns, but recently, there’s been an “about face, and the energy sector has performed well in the last few months,” Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch.

Several factors have contributed to the gains, he said, including Saudi Arabia announcing in June a voluntary cut in production that began in July. WTI and Brent oil futures logged gains in June and July.

More recently, reported comments from Russian officials suggest the country will announce further reductions to its output.

Also, keep in mind that the U.S. will have to refill its Strategic Petroleum Reserve, said Zahir, after seriously depleting the emergency reserve after Russia’s invasion of Ukraine last year raised worries about global oil supplies.

And the energy market, with significant operations in the Gulf of Mexico, remains in the midst of the Atlantic hurricane season, he said. Hurricane Idalia, which made landfall on the Gulf Coast of Florida this week serves as a reminder.

Read Hurricane Idalia: Florida storm is 2023’s costliest U.S. disaster so far

“We still have quite a few months to deal with any further hurricanes,” said Zahir. Atlantic hurricane season doesn’t officially end until Nov. 30.

All of these factors skew the risks to the upside for the energy complex in the “days, weeks and months ahead,” he said.

U.S. supplies

Data from the Energy Information Administration has also shown declines in U.S. crude supplies for the past three weeks, with inventories for the week ended Aug. 25 down 10.6 million barrels.

Over the past three weeks, U.S. oil inventories have fallen by about 22.6 million barrels, OPIS’s Cinquegrana told MarketWatch. “”Inventory draws are starting to add up a bit.”

At 422.9 million barrels last week, domestic crude inventories are about 3% below the five-year average for this time of year, according to the EIA.

Golden cross

Meanwhile, a “bullish technical golden cross has occurred in the energy markets and we feel [it] would be perilous to fight that,” Zahir said.

On Aug. 17, WTI front-month futures formed a so-called golden cross, according to Dow Jones Market Data. That happens when a short-term moving price average crosses above a long-term moving average. The last time it saw a golden cross was on Dec. 7, 2020.

Brent crude also formed a golden cross on Aug. 17.

The 50-day moving averages for WTI and Brent have also consistently closed above the 200-day moving averages since Aug. 17.

When the 50-day moving average jumps above the 200-day moving average, that’s “normally a bullish signal,” said OPIS’s Cinquegrana.

For now, the oil market is at the point where it wants to see more bullish fundamentals heading into the final month of the third quarter, “before jumping all the way in and pushing prices to those $90 levels that some like to talk about,” he said.