Oil's wild ride - will the uptrend resume?

Oil took a bit of a beating early this week. In fact, the entire commodity complex fell on Tuesday & Wednesday. Crude lost over 10% across the two days, before recovering and posting a strong bounce on Thursday.

As always, the chart tells the story. It’s been tough for oil over the past four weeks, falling by more than 22% from the highs at $123.75 and trading below the 20 week moving average:

A close back above the moving average and the $109.60 level could be taken as a bullish sign from a technical perspective.

Zooming in and taking a look at the daily chart, the first step would be a close back above the local low at 103.20.

For the bears, the zone marked in red is key to clear, especially with the 200 day moving average as confluence. The old market saying “nothing good happens below the 200 day moving average” could come into play. Bears might take heart from a push into this area and perhaps target $85 or lower.

Ed Morse, Citi’s Veteran energy analyst, thinks $65 Brent crude could be on the cards by the end of 2022 if there’s a recession

“For oil, the historical evidence suggests that oil demand goes negative only in the worst global recessions,but oil prices fall in all recessions to roughly the marginal cost.”

Definitely something to bear in mind, although many commentators are pointing out that this recession might not be ‘normal’. Arguments have already started about the definition of a recession. Some say it’s a technical matter: Two consecutive quarters of negative GDP growth = recession.

The National Bureau of Economic Research say different (and it’s their job to declare a recession):

The NBER's definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months. In our interpretation of this definition, we treat the three criteria—depth, diffusion, and duration—as somewhat interchangeable.

Although the US did see negative GDP growth in Q1 and the leading data suggests that the same could be true in Q2 it’s not clear that the US economy will pass the recession test. The business cycle’s humming along, and although growth is slowing, there’s minimal evidence of a significant decline in economic activity just yet

Recent moves in oil may have been a simple speculative shakeout. Supply concerns are not dissipating, and the market is still in backwardation, showing that present demand for oil remains strong.

Russia is currently managing to export their oil and refined products for now, although it’s not clear that this can continue indefinitely. There are only so many crude carriers in the world and the supply chain isn’t optimised for the longer journeys to India & China who have been snapping up Russian oil.

Without the demand destruction of a recession, analysts are almost unanimous in their view that it will be tough to keep a cap on oil prices over the next 12 months. There are still big question marks over OPEC+ ability to increase production.

Biden’s visit to Saudi Arabia next week is expected to be a key event to watch for oil traders.

Not investment advice. Past performance does not guarantee or predict future performance.