Oil was up over 1% this morning, with prices on course for their first positive session in over a week. Front-month WTI bounced off support in the $65 region, having fallen to its lowest level since September last year. Before then, you have to go back to May 2023 to find lower prices. The sell-off since mid-January has been relentless, and the month-long rally from December looks like a simple countertrend correction.
There’s so much which has weighed on oil prices. Supply is plentiful, and only looks like it will increase. OPEC+ is set to end its production cuts next month; Russian sanctions (such as they are) could end soon if peace breaks out in Ukraine, and President Trump is deregulating and calling on domestic producers to: ‘Drill, baby, drill!’.
At the same time, the demand growth outlook has been persistently downgraded. First, thanks to China’s property bust and economic slump. Then, as Europe leads the way to alternatives while suffering a protracted period of tepid economic growth, even the US economy looks as if it is coming off the boil, and the recent jump in inventory data has put pressure on prices. But as the old adage goes, the answer to low oil prices is low oil prices.
As prices drop, producers will shutter up uneconomic oil production sites. Supply goes down, and, assuming demand doesn’t as well, prices start to rise again.
Chart-wise, oil is still not particularly oversold. So, while it has managed to hold support, the danger is that there’s a break, which could cause oil to fall further until selling is exhausted. Only then can prices recover. In the meantime, markets should make the most of cheap energy for a while longer.
Source: TradingView
