Crude Oil prices likely to remain under increased pressure in current circumstances

Crude oil prices continue to trend lower, with the WTI contract probing below $80 per barrel and hitting the lowest in eleven months, while the Brent price is well below the $90 mark, at levels last traded in early January.

Both contracts fell below levels where oil prices were at the beginning of the conflict in Ukraine, despite widespread expectations that the war would create much stronger turbulence in the oil market and push the price to $200 per barrel.

Although both benchmarks surged to multi-year highs (WTI hit a $130.48 high and Brent rose to $138.22 per barrel) in an immediate reaction to the early stage of the war, the initial panic response was short-lived.

The subsequent retreat and the stage of a fresh rally was followed by a steady decline, which signaled that markets digested all the news and decisions surrounding the conflict, adjusting to the new reality and becoming a more calm regime, driven by supply and demand, rather than speculations.

Although fears that the war could further increase prices at this stage are significantly lower, the risk of sudden movements cannot be completely dismissed, because oil prices remain volatile and sensitive to a number of factors, which are the main prices.

Sanctions against Russia

The next phase was highlighted by strong supply concerns about severe sanctions against Russia (among which the key target was the energy sector), when oil prices rose again, albeit for a short period, despite the fact that Russia is among the top three oil producers in the world and a sharp reduction in supplies will significantly impact oil markets.

Russian supplies were not seriously hurt by sanctions, which were intended to cut Russia’s main source of income and eventually bring the economy to collapse, this was not a scenario, because many countries found a loophole in the sanctions and continued to buy Russian oil from different. sources

Russian oil was cheaper than the oil of other major OPEC producers, therefore more popular among buyers, with some Western economies continuing to buy second or third hand, Saudi Arabia increased purchases of Russian oil for its domestic needs and selling its own oil at a higher price, while China and India significantly increased imports of Russian oil, with some other countries that do not observe Western sanctions against Russia, continue to buy oil from Russia.

This kept the general situation balanced, preventing oil prices from stronger rises, despite the refusal of the OPEC+ organization to significantly increase production (there was a strong demand and pressure on the US cartel to increase production and lower prices before the US mid-term election. ), keeping the oil prices under control and without stronger oscillations.

China’s Covid restrictions

Currently, the situation in China is the key factor that drives oil prices, as fresh waves of new Covid cases in the country have prompted the authorities to impose restrictions.

China follows a zero-tolerance Covid policy and recent restrictions slowed economic activity in the third quarter, with new limits set to further curb growth in the world’s largest oil importer and damage demand, which would have a more negative impact on oil prices.

China is currently facing the worst situation of the pandemic this year with a sharp increase in new Covid cases in Beijing and nationally, which has prompted authorities to begin closing businesses and schools in many districts and provinces and tighten rules for entering the capital.

The latest wave of infections has caused an immediate impact on oil prices, which have collapsed near the lowest levels in 2022, and the situation has sharpened the sentiment and darkened the outlook.

High inflation and recession

Soaring inflation in the Western world, which hit a record high in the European Union and the highest in forty years in Britain, while price pressures eased slightly in the United States, but still four times above the 2% target, prompted the major. central banks to start raising interest rates to fight inflation.

The US Federal Reserve led the action and was the sharpest, with the other main central banks following in monetary sound policy tightening, which should have resulted in the restoration of price stability, however, the task proved to be more difficult and lasting longer than foreseen.

Inflation in many economies continues to rise and take root, making it difficult for central banks to control rising inflation.

Also, higher interest rates hurt economies by slowing economic growth, with some economies already in a recession that can last for several quarters.

Slower economic activity directly affects demand for oil, adding to persistent concerns that global demand would weaken further and keep oil prices under increased pressure.

Technical view

The overall picture remains bearish aligned, based on fundamentals, with bearish technical studies on the daily and weekly chart, contributing to a darkened short-term outlook.

Also, bearish signals are developing on the monthly chart as the price action holds below major Fibonacci support (38.2% retracement from post-pandemic $6.52/$130.48 rally) for the third consecutive month and 14-period momentum on a monthly chart goes south and pressing the border of negative territory.

All these factors contribute to the negative scenario in which the price of crude oil is expected to remain under strong pressure in the coming months.

Only a major change in fundamentals could change the picture, although such a scenario is quite unlikely, but cannot be ruled out.