Brent crude oil price: technical bias turns further negative after 20% drop
Tussle between supply and demand side factors continue, with worsening global economic outlook denting the latter.
Brent's price slid again yesterday and is now down more than 20% from its recent April peak above $75, breaching an important mid-term support level in the process as demand side worries overcome supply side shocks to keep the energy commodity’s price close to the lows.
Worsening trade war leads to slowing demand
On the demand side, a worsening trade war is causing demand for oil to plummet not just on an expected reduction in global growth rates as turbulence in international trade spirals out of control, but also on China’s currency devaluation that sent the yuan tumbling against the greenback. That sent commodity prices plummeting, as a falling currency results in reduced purchasing power, and a real threat to commodity demand given China’s massive consumption of inputs. And it isn’t just the short-term outlook either, as the mid- to long-term growth outlook as witnessed in the bond market with long-term yields plummeting (and for some) into negative territory remains worrying to say the least.
And then there’s competition from alternative energy sources, with stronger emissions controls forcing car companies into investing and introducing a heavy lineup of electric cars, as both energy and transportation grids evolve in a shift towards less reliance on oil in the coming years.
Oil staves off heavier falls due to supply side factors
Bearish news for oil then, yet it has managed to stave off heavier declines due to supply side factors. Organisation of Petroleum Exporting Countries plus Russia and others (OPEC+) members’ agreement to keep oil output cuts in place in the hopes of reviving oil prices with their budget commitments rising, geopolitical tensions failing to subside both in the Middle East and in Latin America with the recent US asset freeze and sanctions on oil producer Venezuela, US inventories declining following yesterday’s successive API deficit – this time to the tune of 3.4 millon and ahead of Energy Information Administration's (EIA’s) more encompassing estimate later today expected to show a similar deficit, and Baker Hughes’ US oil rig count registering yet another successive decline to 770 from the week before’s 776 reading.
All of these supply factors threaten continuity within the supply market, yet there is one wild card on this front: a worsening trade war that attempts to isolate China could push them to start importing Iranian oil again (or is already doing so according to the latest accusations and is set to up that figure). That would mean millions of barrels of previously sanctioned and untouched oil would now flood the system, and put oil bears in full control with little in the way to stop them as both falling demand and rising supply keep the pressure on oil prices.
How to trade oil
As it stands, the technical overview is an initialising bear trend, and hence conformist technical strategies are selling the first resistance level of 59.6 after a reversal, waiting for any upside movement to die down first and initiate the sell after it drops below the first resistance with the stop loss (S/L on the table) mentioned. If follow through picks up, selling at the first support level anticipating a further breakdown is also another option, though if the breakdown isn’t significant consider limited profit-taking. Contrarian traders can consider buying the first support level at the stop loss mentioned in the table.
IGA, may distribute information/research produced by its respective foreign affiliates within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.
The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.
Please see important Research Disclaimer.
Trade on commodities
Trade commodity futures, as well as 27 commodity markets with no fixed expiries.1
- Wide range of popular and niche metals, energies and softs
- Spreads from 0.3 pts on Spot Gold, 2 pts on Spot Silver and 2.8 pts on Oil
- View continuous charting, backdated for up to five years
1In the case of all DFBs, there is a fixed expiry at some point in the future.
Live prices on most popular markets
Prices above are subject to our website terms and agreements. Prices are indicative only. All shares prices are delayed by at least 15 mins.