The oil markets have been getting smashed in recent weeks. Main street is cheering it as it means less for gas at the pumps. Wall street is cheering it because energy is a significant portion of CPI and lower oil prices definitely brings down those inflation numbers.
Canada’s inflation data came out today and gasoline prices helped cool inflation.
With recession headlines from central banks raising interest rates, many analysts are betting on oil prices to drop. If the economy is slowing down, then less oil (which is the lifeblood of the economy) will be used for construction and other economic activities.
But are there any concerns for oil to reverse and move higher? Let’s think as contrarians. Some contrarians are saying that supply chain disruptions and price caps on Russian oil will come back to bite us in the form of shortages and higher oil prices.
There are also the concerns of geopolitical tensions which could see oil prices rise. Perhaps something in the Middle East. Speaking of the Middle East, OPEC+ is another factor which could see oil prices rise. We have seen OPEC shifting from production hikes to production cuts and this has strained relations between the US and Saudi Arabia. With oil prices dropping from impending recession, OPEC+ may attempt to prop prices.
But there is one factor which many are not considering. And this is the most likely reason for oil prices to rise.
China. Long oil is the China reopening trade. Or the COVID zero pivot bet. The country has been in another lockdown due to a COVID outbreak. You have seen the reaction by the people with protests on the street. Pressures are building for Xi Jinping to drop restrictions. The markets are expecting a China restrictions drop.
We are used to central banks raising rates and tightening. Even the Bank of Japan has shifted into slightly hawkish mode. The People’s Bank of China remains one of the central banks maintaining an easy money policy. Cutting rates and stimulating the economy with money.
With low interest rates, the setup is prime for oil to move higher as China comes back online supported by easy monetary policy.
If you are looking for technicals to confirm a reversal, you are in luck. For now.
It appears like both West Texas and Brent Crude oil charts are forming a reversal pattern known as the cup and handle pattern.
After breaking below major recent support, oil prices did not continue the downwards move. Instead, we reversed and are looking to close back above the breakdown zone, nullifying the breakdown.
If West Texas oil can confirm a close above $77.60, the cup and handle will have been triggered and we will be targeting $85 and higher.
If Brent can close above $83.25, then we will trigger the pattern and price can move back above $90.
Of course, we could see sellers step in and push the prices down and not give us the breakout close we want. However, multiple other confluences such as a cross over the moving average and a trendline break hint to higher oil prices.