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WTI, Brent drop as demand concerns outweigh geopolitical tensions

Saudi’s signal challenges to the oil market during seasonally lower demand, Brent crude oil prices drop at the start of the week, while geopolitical developments may limit downside.

Source: Bloomberg

Saudi's signal oil market challenges during lower demand

At the start of this week oil prices appear to be eating into last week's gains despite continued geopolitical tensions and rerouting of cargoes typically travelling through the Red Sea amid attacks from Houthi rebels.

The recent Houthi attacks theoretically have a bullish effect on oil prices as cargoes have been rerouted to avoid potential hotspots, which can cause delays and hence supply shortages. Nevertheless, at the start of this week oil prices have declined around 4% on both the Brent and WTI benchmarks.

A number of fundamental factors have aligned to see oil prices approach a new low. Saudi Arabia lowered its official selling price for February shipments destined for Asia, suggesting a deteriorating appetite from China – a major player in the oil market. From a seasonality standpoint, Q1 represents the weakest demand period, adding to the possibility that the oil market may be oversupplied.

In addition, dropping prices to a 27-month low also confirms the effect of competition from non-OPEC producers which have gained market share at a time when OPEC has been cutting supply into the market.

Brent prices to drop at start of the week

Oil prices failed to breach the 50 simple moving average (SMA) (the blue line) last week and have been sent sharply lower on Monday. The longer-term downtrend bears testament to global growth concerns and a challenging economic outlook in China.

Therefore, the rejection of the 50 SMA provides another indication of a bearish continuation that now highlights $71.50 as a major level of support. The level prevented further selling throughout May and June in 2023.

The RSI has just turned south of the midway mark meaning there is still further potential for extended selling pressure. The main challenge to the current direction of travel is of course the developing situation in the Middle East which could prevent prices from plummeting.

Brent crude oil daily chart

Source: Trading View

WTI tests $70 with $67 on the horizon

The WTI chart provides a similar picture to that witnessed on the Brent chart and as of 5pm GMT reveals a drop of as much as 4.8% on the day thus far. The $70 mark provides immediate support with the $67 marker not too far off.

The figure $67 was a pseudo level of support before the Biden administration walked back on its prior statement that it would look to refill the Special Petroleum Reserve (SPR) when oil prices stabilised between $67 and $72 for a reasonable amount of time.

More recent communication form the Department of Energy suggests this process will take a lot longer to play out meaning the market is unlikely to expect a mass amount of buying taking place at the prior mentioned levels. Nevertheless, $67 is still an area of interest from a technical perspective

WTI Oil daily chart

Source: Trading View

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