Crude oil is heading for its first monthly decline since November will it fall back further or is the dip a buying opportunity? Our view is the economic outlook warns of more downside. The logic of the trade and key technical levels to look out for are below.
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A Global Recession Bearish Crude Oil
The global economy is clearly slowing and there is a risk of a recession. The US 10-year interest rate warns of a recession and has fallen lower while crude oil remains firm against it on the chart below.
Another correlation to look out for Is Oil v metals: “Oil and BCOMIN (metals sub index) are two different assets obviously, but there is some “connection” between these two. The latest implosion in the BCOMIN index has left a huge gap vs oil.
“Second chart shows the 06-09 period. Back then we had the China bull that was supposed to “consume” all commodities, BCOMIN and oil included. Note the early 08 divergences between the two that was eventually corrected as oil caught up to “reality”. Sure, this time is different, but being bullish oil her is not overly unique…and we like to think about the non-consensus.” (The Market Ear)
Crude Oil Supply and Demand Outlook
As the US and the global economy slows demand has started to weaken.
US gasoline demand, with near-record prices, is suppressing consumption. The four-week moving average of gasoline supplied fell below 9 million barrels a day, or about 600,000 barrels less than typical seasonal levels – we have demand destruction due to higher prices and the slowing economy will continue to weigh on demand.
A lot of forecasters note the Russia-Ukraine conflict and the interruption of supply as bullish oil but as the Market Ear point out earlier this view is consensus and buying on the story is old news.
Crude oil despite the recent fall is up about 45% this year and this price rise is extreme against the economic backdrop. Crude oil is too far from fair value and we expect it to work its way lower in the coming months with rallies being selling opportunities
On the chart below major resistance is at 115.00 and the 20-day moving average and rallies are expected to fade back to this level. We would expect a move down to major support at 95.00 longer term.