FIS: Crude Oil Market Overview: Recession fears and Biden’s headache

European and Asian stocks edged lower in Tuesday morning trading as traders weighted further interest rate rises by central banks in a stance following the aggressive stance of the U.S. Federal Bank.

The European Central Bank is expected to raise rates out of negative territory and the U.S. Fed is expected to raise rates by 0.75 basis points next week. With the United States taking such a strong line with interest rates to combat rampant inflation, many other central banks are having to keep pace with these rate hikes or risk further imported inflationary problems.

The FT reported that 41 cities in China are currently under lockdown measures, an area which accounts for some 18.7% of the country’s economic activity. With China having missed economic forecasts for Q2 of this year, expanding only 0.4%, these lockdowns are adding further concern to the state of the world economy. With Chinese growth driving a significant portion of the world economy, its current predicament leaves many pessimistic about near-term economic prospects.

With inflation in the United States at over 9%, President Joe Biden has few tools at his disposal to deal with this problem whilst concurrently driving on with his plan to transition the country towards a greener future. Although in the run-up to his election there was much talk about investment in green energy production, the U.S. government is now looking to other oil-producing countries around the world, as well as its oil industry, to cool energy prices and the ultimate issue for midterm elections in November—petrol prices.

The supreme court having neutered EPA’s ability to regulate coal-fired power stations coupled with the immediate energy crisis has left much of the lauded green strategy in the U.S. in doubt.

The president has instead started a tour of the Middle East in what was meant to be a more politically focused trip, but one which is overshadowed by Biden’s desire for OPEC to help cool global energy markets with increased supply.

Saudi Arabia, the largest oil producer in OPEC, did not look like it was willing, or able, to significantly increase production. The Crown Prince informed other country heads at a summit this weekend past that the previously pledged 13 million barrels per day (bpd) of capacity by 2027 is a maximum level. As sanctions on Russia have removed a significant proportion of world oil production for Western countries, it was hoped that much of this could be offset by increased production by other OPEC members.

With a panacea for the world’s energy problems elusive, citizens in Europe and United States are being asked to reduce their energy usage to help bridge this period of high prices and low supply. The EU is preparing to ask member states to slash their gas use to conserve supplies for the winter after Russia cuts gas pipeline supplies to the continent. The EU is actively engaging with countries like Qatar, Georgia, Israel, and United States to replace Russian supply, but resources need to be conserved before these deals have the time to ramp up to meet needs.

The growing concern about the energy squeeze in Europe can also be seen with increasing shipments of coal into EU ports. 117 Panamax vessels called into ports in June, up from 95 in January with volumes in the first six months of this year up 49.6% year-on-year.

Worse case scenarios run by JP Morgan have predicted a $380 price for oil with an immediate cut to supplies to Western countries. This would also be accompanied by a sharp economic hit as energy rationing would hit businesses and reduce productivity. According to the IMF, gas consumption in Europe has already dropped 9% this year, dropping EU GDP by 0.2%. With many economies making a fragile exit from covid-related recessions, this will be of major concern to heads of European countries.

Despite increased pressure from Western nations, especially the U.S., Saudi Arabia has not increased its oil exports in any significant way. This had analysts worried that increased supply to cool prices might not happen soon.

Technical view of the crude oil market:

September Futures – As noted last week, intraday Elliott wave analysis warned that the USD 98.50 support remained vulnerable.

The futures traded USD 14.00 lower over the next three sessions.

The futures have produced 5-waves lower on what looks to have been an extended wave wave-3 of a higher timeframe cycle. This would imply that the current upside move should be considered as a countertrend, warning there is a potential bearish wave 5 to follow.

Upside moves that fail at or below USD 111.60 will leave the technical vulnerable to further tests to the downside. Above this level the technical will have a neutral bias. Only above USD 120.41 will the wave cycle have failed.

Downside moves (based on the current day’s high of USD 105.34 18/07) that trade below USD 94.50 have further support at USD 93.63 and USD 90.00, with a potential downside target as low as USD 86.37, using William’s approach.

Written by Edward Hutton, Edited by Chris Hudson (https://freightinvestorservices.com/fis-live/).