Prices falling below $90 a barrel “is quite remarkable given how tight the market remains and how little scope there is to relieve that,” said Craig Erlam, senior market analyst at Oanda. “But recession talk is getting louder and should it become reality, it will likely address some of the imbalance. Just not in the way we’d like.”
Crude has now given up all the gains triggered by Russia’s invasion of Ukraine in February. Since peaking at more than $130 a barrel in March, the US benchmark has been dragged lower by signs that Moscow is still getting its cargoes onto the global market and escalating investor concerns that a global slowdown will erode energy consumption.
Despite the recent price weaknesses, Saudi Arabia raised its oil prices for buyers in Asia to a record level, a sign the world’s largest exporter sees the region’s market remaining tight. OPEC+ agreed to boost supply by a meager 100,000 barrels a day in September, while issuing a stark warning on “severely limited” spare capacity.
I have been at pains to highlight the fact analysts often make the mistake of treating demand as a constant. That conclusion works most of the time. Oil demand has tended to rise with living standards, so it is reasonable to predict a constant growth rate in demand. The challenge is demand is much more volatile at major market peaks. That’s when the adage the cure for high prices is high prices becomes most relevant.
West Texas Intermediate broke lower to new five-month lows today and may be in the process of completing a Type-1 top with right hand extension. A sustained move above $100 will be required to question scope for additional downside.
Copper led on the downside and is still trading below the 1000-day MA. There is scope for a further unwind of the short-term oversold condition, but the bigger picture is slowing Chinese demand.
Gold continues to unwind its short-term oversold condition and is back testing the psychological $1800 level. A sustained move above that area would confirm more than short-term support in the $1700 area.