• Saturday, June 22, 2024
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Crude oil: A sudden tumble

Higher oil price seen easing rising oil loan pressure

The major headline-catching storyline throughout the latter half of 2014 and even the opening week of 2015 has been the dramatic plummet in oil prices, with Crude having declined by around 50 percent since last June.

Concerns over an oversupply of oil in the markets encouraged bearish pressure, while heightened anxiety over global economic health inspired fears that there would be less demand for the commodity and further elevated anxiety regarding there being an oversupply in the markets. This encouraged further downside movement; while the OPEC decision not to cut production last November went on to inspire the commodity to conclude the year around five-year lows.

There was some optimism that the oil markets had found a floor when the selling paused around Christmas, but it was always expected that this was just a small consolidation while traders took a break over the holiday. I was also curious that the consolidation could have been a preparation for the next leg lower, which proved to be the case. As 2015 has commenced, the decline in oil prices has resumed with Crude already losing a further $5 from its valuation.

Traders have become increasingly aware regarding the current economic conditions being strictly against the commodity, where the heavily-weighted supply and demand equation has only had one outcome: further declines for oil and economic conditions so heavily against a comeback that even the most risky of investors are being eliminated from considering purchasing.

Despite the bears completely dominating and squeezing as much as they can to squash prices, there remains optimism that Crude can rebound back towards $70. I question the potential for this because the OPEC decision not to cut production in November basically suggested that the committee group were no longer in control of the oil markets, and confirmed a longer-term bearish outlook for oil.

Read also: Nigeria risks declining earnings from crude oil

A rebound would be dependent on OPEC reversing its decision against cutting production and with prices already crashing down below $50, this appears unlikely as well. Could OPEC reverse its decision in the future?

Perhaps, however, traders will continue to price in as many declines as possible beforehand. Furthermore, oil inventories are increasing on what appears to be a weekly basis and it would require a significant cut in production, otherwise inventories will just creep back up to the same levels where there is another oversupply.

Additionally a rebound would also likely be dependent on increased demand for the commodity but with global economic health concerns being so elevated, this is hard to envisage. It appears highly likely that global growth concerns will continue throughout the first quarter in 2015.

This would more likely lead to further anxiety over reduced demand for the commodity, and encourage bearish pressure. Economic data from China is also highly important, due to the world’s second-largest economy being the largest importer of oil. It is no coincidence at all that in the hours following China’s worst PMI manufacturing decline of the year, pressure resumed in the oil markets.

It is also worth noting that crude is priced in USD and towards the middle of 2015, the overwhelming majority expect the Federal Reserve to begin raising US interest rates. This will lead to an aggressive USD rally, while spelling further bad news for commodities and metals. The Fed raising rates will pressure Crude and as long as the Fed raises rates as planned towards the middle of next year, the commodity will face a further downside risk.

Overall, there are just so many economic conditions being against a comeback that it makes it difficult to believe one will happen anytime soon. Can it happen? Sure. However, it is going to require a combination of greatly reduced concerns over an oversupply in the markets, and global economic optimism raising demand, for oil to wake up the bulls. Getting these two factors to collaborate at the same time might also be tricky.

The technicals currently paint an extremely depressing picture for crude oil, to the point where the price has tumbled so rapidly that no technical patterns can even be found. We have already crashed through psychological support around $70, $63, $57, $52 and $47.

The $42 area is widely seen as the next big test and if we extend below here, it is going to require some time for the prices to even find a floor, let alone any type of rebound back towards $70.

Jameel Ahmad, chief market analyst at FXTM