OIL quickly reversed its gain after China’s ailing consumption, a delay in US Federal Reserve interest rate cuts and many other factors cut off whatever little was left of supply-side momentum, and kept oil prices afloat. The US labour market’s resilience pushed back hopes of a potential Fed monetary easing until the second half of the year, while the budding US banking crisis shook the ground beneath oil prices. Historically, oil prices tended to perform miserably whenever banking stability was threatened, and the recent liquidation of China’s massively indebted real estate developer Evergrande has inclined investors to question oil price stability.
Oil prices have been see-sawing all throughout January 2024, with fundamentals exerting immense pressures – whether it was China’s ambiguous post-Covid recovery failing to provide impetus to oil bulls or the seemingly never-ending dilemma of Fed’s timeline and pace of rate cuts.
The constant twists and turns in the Middle-East crisis also continue to affect oil markets. Despite reports of ceasefire discussions between Israel and Hamas leaders emerging, the US continued retaliatory strikes against Houthi forces. Oil erased gains booked in 2024, propelled by geo-political stress, and lost over 7 per cent in the last week of January as investors shifted focus to the ailing demand-side narrative. Technically, Brent tried to sustain an upside rally and breached the 200-day Moving Average of US$83 per barrel in January. However, it came crashing down below the short-term upward trend line, as the ceasefire talks emerged in the Middle-East.
The renewed strength of the US dollar, driven by the Fed’s reluctance to risk deflation, is primarily magnifying headwinds on oil prices, especially when the war premium seems to have dissipated. So, does the end of the geo-political crisis signal the beginning of oil’s turmoil?
The optimism of investors has been shaken and it would be unrealistic to ignore the negative sentiment that is setting in. Short-term investors are advised to follow the “sell on rise strategy”, whenever Brent tries to hover around the 200-Day Moving Average.
Oil players remain unconvinced by both the US Energy Information Administration (EIA) and Opec forecasts, even though they suggest a record demand for oil in 2024 and 2025. Currently, oil markets are valuing prices based more on demand-side concerns rather than fears of conflict in the oil-rich Middle East. Brent is falling below the long-term triangle formation, and if the bearish trend continues, it could easily test the long-term support of US$70 to US$72 per barrel zone.
Reports from EIA indicate a downtrend in oil production and consumption in the US. Moreover, there is little to support hopes of record demand from China, the largest importer of crude oil. A slight increase in the threat to banking stability could trigger a massive offload in long positions. Unless Opec+ comes to oil’s rescue, the price outlook seems bleak.
The writer is senior market analyst at Phillip Nova
