Further EUR/USD declines could trigger large CTA unwinds: BofA
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Brent oil prices have managed to claw back some losses over the past couple of days, but still remained in the negative territory for the week amid recession concerns hurting demand. Will the selling resume here?
Though supply remains tight, oil is no longer a one-direction trade.
As per the daily chart of Brent futures, oil prices have created a few bearish signals to suggest the bullish trend has ended, or at least weakened. The move below the 50-day average, for one, is not a great indication of a strong market anymore. For prices to move below this average in a previously trending market, it usually requires either a period of lengthy consolidation or a sell-off. We have seen a bit of both, ever since March as prices have been swinging inside large ranges. That strong bullish momentum is no longer there, making crude oil a more tradable market.
What’s more, we have seen the breakdown of several key support levels, including $115.00 and more recently $111.50 following Wednesday’s sell-off. That breakdown also took oil prices below the bullish trend line in further technical damage.
Thus, it is possible that we might see the selling pressure return now that oil has stabilized somewhat over the past couple of days, as prices test that former support zone between $111.50 to $115.00.
Perhaps it might not be a bad idea to zoom into smaller time frames for some confirmation within this zone, before potentially shorting crude. For indeed, shorting crude is like playing with fire. Traders looking to take advantage of potentially lower prices, must pick their levels carefully and sell as close to resistance as possible, ensuring to never violate one’s risk management strategies.
Assuming the above resistance zone holds, a drop to the next bearish target at $105.00 looks within reach now. I also wouldn’t rule out a move to $100.00 in the next couple of weeks if demand concerns intensify.
Concerned that the Fed and other central banks will have difficulty reining in inflation without pushing the global economy into a recession, investors have sold commodities in recent weeks, with both crude and copper falling sharply from time to time. We have also seen weak PMI from both sides of the Atlantic. Given that the US is the largest consumer of oil, a recession there would be bad news for oil.
Aside from these macro influences, the tightness in the market might grow further if we lose more Russian supply. This should keep a floor under prices. OPEC, meanwhile, is due to meet next week. The cartel and its allied producers are unlikely to deviate from the plan after agreeing to a 648k barrel rise in July and the same in August.
So, all told, I am not expecting too big a move to the downside just yet as the supply remains tight. The weakness in demand outlook will only have a limited impact as oil is one of the most demand-inelastic commodities out there.