Crude Oil, US Dollar, WTI, Brent, Russia, Fed, Recession, Inflation – Talking Points
- Crude oil prices are eyeing fresh lows while the US Dollar gains
- The Federal Reserve has made its intension on inflation clear
- With large moves unfolding, where will WTI crude end up?
Crude has sunk to a 3-month low overnight as the US Dollar soared higher after the June Federal Open Market Committee (FOMC) meeting minutes were released.
The Fed noted that to avoid higher inflation becoming entrenched, interest rates may need to keep rising for longer, even if that leads to a slower economic outcome. This saw Treasury yields lift again across the curve.
It is somewhat ironic that the surge in inflation has been significantly attributed to commodity prices rocketing higher, but these prices are now the victim of policy responses to such inflation.
The US Dollar has surged across the board against currencies and commodities alike. The latest sell off in crude prices has been attributed to recession fears and higher rates. The dynamics with the oil market have not changed markedly.
Global supply constraints remain an issue, with the West looking to impose a cap on the price of Russian oil. While the easing of political tensions in Ecuador has seen most of their production return, Libya and Kazakhstan face ongoing issues to get their oil products to market.
Conversely, recent data from Baker Hughes, an energy technology company, revealed one more oil rig was added to the end of last week in the US. Total rigs now stand at 595 versus 376 from a year ago.
Amongst all that, the wide disparity of analyst forecasts perhaps reflects the uncertainly facing producers and consumers.
Citigroup have forecasts of US$ 65 bbl as they cite higher prices creating demand destruction that will see the supply and demand dynamics pull the price lower. Meanwhile, JP Morgan have reported that in the worst-case scenario, crude could get as high US$ 380 bbl next year.
WTI CRUDE OIL TECHNICAL ANALYSIS
The latest sell off in WTI went below two previous lows before stopping at 95.10, near a third prior low. This level may continue to provide support.
Further down, previous lows at 93.53 and 92.93, that sit just above the 200-day Simple Moving Average (SMA),could also provide support.
On the topside, nearby resistance might be at the breakpoint of 101.53, which is just below the 5-day SMA.
Backwardation is when the contract closest to settlement is more expensive than the contract that is settling after the first one. It highlights a willingness by the market to pay more to have immediate delivery, rather than having to wait.
Backwardation has eased off in the last few days and could indicate that a push to the March high of US$ 130.50 may not be imminent for now.
Potentially offsetting that is the OVX index, a measure of oil volatility. It has remained sanguine toward this run up, which could indicate that the market is getting used to elevated prices.
Looking ahead, the U.S. Energy Information Administration (EIA) reports on inventory later today.
— Written by Daniel McCarthy, Strategist for DailyFX.com
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