The oil market might be sensing demand destruction as Fed hikes come into the equation
FUNDAMENTAL
OVERVIEW
The oil market has been dead for months. The price action has been mostly
rangebound with bouts of volatility caused by US-Iran headlines. There is no direction
whatsoever, just noise in a wide range.
Last Friday, we got some interesting reaction to the US NFP report. Oil
prices fell alongside many other markets as the US jobs data raised the
probabilities of the Fed being forced to deliver one or more rate hikes due to
prolonged US-Iran stalemate and elevated inflation.
I mentioned in previous articles that there’s a scenario where the global
economy falls into recession due to central banks tightening into a negative
supply shock. In fact, this action by the Fed would likely lead to a bear
market and trigger the ripple effect of lower business confidence, layoffs and
so on. That would bring oil prices lower on demand destruction even if the
Strait of Hormuz remains closed.
The recent weakness in the oil market seems to be linked to this scenario
since markets move based on future expectations. So, the upside is capped by the
risk of Fed tightening and slowing demand or Trump caving in and making a deal
at some point. The downside is more likely even if we get one last spike on
another war as that would just accelerate the demand destruction thesis.
CRUDE OIL
TECHNICAL ANALYSIS – DAILY TIMEFRAME
On the daily chart, we can
see that crude oil has been stuck in a huge range and the price action has been
mainly driven by US-Iran headlines. We have two major levels on the downside
with the upward trendline and the support zone around the 78.00 level. On the upside,
we have the downward trendline and the cycle highs above the 120.00 mark. We
need to zoom in to see some more details.
CRUDE OIL TECHNICAL
ANALYSIS – 4 HOUR TIMEFRAME
On the 4 hour chart, we have
a downward trendline defining the bearish structure. From a risk management
perspective, the sellers will have a better risk to reward setup around the
trendline to position for a drop into the 78.00 support. The buyers, on the
other hand, will want to see the price breaking higher to extend the rally into
the major trendline around the 110.00 level.
CRUDE OIL TECHNICAL
ANALYSIS – 1 HOUR TIMEFRAME
On the 1 hour chart, we have
a resistance zone around the 90.00 handle. We can expect the sellers to step in
there with a defined risk above the resistance to keep pushing into new lows.
The buyers, on the other hand, will look for a break higher to pile in for a
rally into the trendline around the 96.00 level. The red lines define the average daily range for today.
UPCOMING CATALYSTS
Today, we have the US
CPI report. Tomorrow, we get the latest US Jobless Claims figures and the US
PPI report. On Friday, we conclude the week with the University of Michigan
consumer sentiment survey.
This article was written by Giuseppe Dellamotta at investinglive.com.