With the current state of affairs in the Middle East, it may come to a surprise that oil prices are falling. But then again, the stock market seems to not be worried about escalation with markets rising in recent days (but this is most likely the market repricing no rate hike in December!).
After hitting prices above $90, oil has fallen below $80 on both West Texas and Brent Crude, lessening the fears of a surprise uptick inflation report. But the drop in oil prices comes from reports on concerns of waning demand in the United States and China.
“The market is clearly less concerned about the potential for Middle Eastern supply disruptions and is instead focused on an easing in the balance,” ING analysts Warren Patterson and Ewa Manthey said in a note to clients, referring to crude supply conditions.
Crude production in the United States this year is expected to rise slightly less than previously expected but demand will fall. The EIA now expects total U.S. petroleum consumption to fall by 300,000 barrels per day (bpd) this year, reversing its previous forecast of a 100,000 bpd increase.
Data from China, the world’s biggest crude oil importer, showed its total exports of goods and services contracted faster than expected, feeding worries about the energy demand outlook. Still, China’s October crude oil imports showed robust growth and its central bank governor said on Wednesday that the world’s second-biggest economy is expected to hit its gross domestic product growth target this year. Beijing has set a target of about 5% growth. Let’s just say the China data is mixed… which adds even more uncertainty.
China’s exports have fallen for six consecutive months now as higher interest rates put downward pressure on the global economy.
Can anyone say that “R” word? Recession fears.
“The meltdown we’ve seen in prices is reflecting two things: concerns about the global economy hitting a brick wall based on data out of China and also a sense of confidence that the war in Israel and the Gaza Strip is not going to impact supply,” said Phil Flynn, analyst at Price Futures Group.
Chinese data has offset the effects of OPEC+ members Saudi Arabia and Russia output cuts which have lifted oil prices this week. Both nations have said they will keep these cuts in place until at least the end of the year.
Some have said a stronger US Dollar is weighing in on oil. Well, the Dollar has broken below a major support zone and is currently undergoing a retest. The Dollar is set to weaken further unless bulls can confirm a close above the 105.80 zone.
Let’s take a look at the oil charts.
West Texas closed below the current higher low near $90. That is when the uptrend was technically in danger of being over. Oil attempted to climb back above $90 to regain the higher low zone but sellers jumped in. Oil then confirmed a break below support at $80 yesterday and continues to drop further.
Now oil is set to test a major support zone. You can see how important the $72-$74 zone is just by looking to the price action to the left. This is where shorts would be taking some profits, and where buyers could enter for a reversal. This is a zone where selling pressure could exhaust.
I say could because the candles need to give us signs. I would be watching for a large wick candle, a large green engulfing candle, and a range showing that selling pressure has exhausted. A breakout of said range would then lead to a bounce at this support.
For those a bit eager and follow the oil markets regularly, you can front run a reversal on the 1 hour intraday chart by watching for a 1 hour candle close above the $77.50 zone. This would take out the current lower high on the intraday chart.
Stops would be placed below the major daily support zone.
I must say that the current lower high on the daily chart comes in at $84. This means there would still be some work to be done to confirm a swing trade/medium term reversal.
Taking a quick look at Brent Crude, and you will see that the technicals look exactly the same. Just different price levels as Brent Crude is more expensive. Once again, clearly a major support zone is approaching around the $78 zone and this is where one should expect selling pressure to exhaust.
The Canadian Loonie is also correlated with oil prices. With weaker oil prices, the Loonie has depreciated against the US Dollar. If oil does break below our major support zones, USDCAD could break above over $1.39.