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A bottom in the oil price – or another leg down?

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Carlsquare
18 Aug 2022 | 2 min read
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The oil price has pulled back considerably from the highs at the beginning of the summer. Despite a tight supply situation and the ongoing energy crisis in Europe, fears of an economic slowdown in the US, as well as China, is now a prevailing theme in metal and energy markets.

The oil price has pulled back considerably from the highs at the beginning of the summer. Despite a tight supply situation and the ongoing energy crisis in Europe, fears of an economic slowdown in the US, as well as China, is now a prevailing theme in metal and energy markets.

The relation between interest rates (in the chart below: 10 year US yield) and the oil price is surprisingly strong. However, the recent pick-up in rates has only had a limited impact on oil. Possible explanations are a recent build in inventory and some short-term headwinds from increasing real yields and a stronger US dollar.

Interest rate vs. oil price

2022-08-17_CS1
Source: Stockcharts and Carlsquare. Note: Past performance is not a reliable indicator of future results. Left: CBOE 10 Year Treasury Note Yield Index. Right: WTI Light Crude Oil CME contract in USD.

However, the tight supply means that prices are sensitive to sudden shocks (e.g., lower Russian exports, Hurricane season) which risk could be driving prices higher in the coming months. Also, in Europe, oil might serve (albeit only partly) as a substitute for expensive natural gas. Since the Biden administration is trying to push down oil prices in the US ahead of the mid-term elections in November, through the release of strategic petroleum reserves, we would focus on Brent oil.

From a technical perspective, the oil price is in a negative trend below MA 200 which likely means continued volatility in the near term. Nevertheless, there might be a bounce from the USD 92-93 per barrel level if these recent bottoms should hold. The five-year chart also suggests Brent could find support around these levels. The USD 100 level is a natural first target.

2022-08-17_CS2
Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

However, the price action has been decidedly negative in recent days and bulls would need to see prices rebound soon.  In a negative scenario where the price breaks down further, the charts suggest a downside to USD 85 per barrel.

2022-08-17_CS3
Source: Infront and Carlsquare. Note: Past performance is not a reliable indicator of future results.

The full name for abbreviations used in the previous text:
EMA 9: 9-day exponential moving average
Fibonacci: There are several Fibonacci lines used in technical analysis. Fibonacci numbers are a sequence of numbers in which each successive number is the sum of the two previous numbers.
MA20: 20-day moving average
MA50: 50-day moving average
MA100: 100-day moving average
MA200: 200-day moving average
MACD: Moving average convergence divergence

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