Western countries are trying to find other options for oil and gas supplies after a 10th package of sanctions, which will put more pressure on Russian oil and decrease global oil supply. Italy, for example, is in talks with Libya.
What can drive oil below $90 a barrel?
Information is not investment advice
The past two years have seen the biggest swings in oil prices in 14 years. This rollercoaster has baffled markets, investors, and traders. The main reasons for such dynamics were geopolitical tensions and the shift towards clean energy. In the last two years, oil traded as cheaply as $19 a barrel - or at minus levels if you're looking at WTI futures - and it went up to $139.
We haven't seen such huge swings in oil prices since the 2008 financial crisis when oil collapsed from $150 to less than $40. The collapse was due to the fears of a global recession, which led to a drop in oil demand as in our current situation.
Reasons why are oil prices volatile now
- The COVID-19 pandemic, the following lockdowns, and their consequences that we are suffering from now.
- Shift towards clean energy and reducing harmful emissions.;
- Lack of investment in new oil projects due to the high cost and low demand.
- OPEC + policy, massive supplies cuts, and the following attempts to re-pump these supplies into the market.
- Above all, the unpredictability of Russia's actions and the fate of Russian oil.
The result was a sharp rise in inflation amid sluggish demand, slowing economic growth, and growing recession fears.
Two cases for oil to slide below $90
Oil prices may drop to $90 a barrel if the world's largest oil consumers continue to struggle with high inflation and low growth.
- If the United States continues to suffer from high inflation, which leads to a slowdown in economic growth and a decline in demand with higher prices for fuel and services for consumers, and fears that the US economy will enter a recession.
- If China cannot find solutions to its economic problems and the repeated shutdowns that threaten its production and growth, which in turn affects the global economy.
Oil may drop below $90 and stay around this range for a while. Economic woes in the world's two largest economies will affect oil demand. The effects will, of course, be seen on Brent and US WTI prices.
A case that may support oil
At the same time, oil demand may find some support from record high natural gas prices, especially in Europe. That will prompt consumers and factories to switch to oil-fueled generation to survive the brutal winter ahead. In addition, the oil supply is not expanding and may even face problems in the coming period as oil demand increases in the winter.
Supply concerns are expected to escalate as winter approaches, as EU sanctions banning sea imports of Russian crude and oil products are set to take effect on December 5. The modest increase approved by the OPEC+ of 100,000 barrels per day in September will not be enough to meet the increased demand.
Technically, Brent (XBRUSD) may drop to 80.00 if it breaks below $90 and settles below that level.
The EU plans to intervene in markets directly to curb rising energy costs, threatening to push the Euro area's economy into a deep recession.
US oil exports reached a record last week at five million barrels a day, according to Energy Information Administration data…
This week, there are a few high-probability trade ideas I'd like to recommend to you. Trading these setups, be sure to implement a proper risk management approach.
On Thursday, the 2nd of February, the Bank of England will publish its report concerning interest rates and inflation data for the Eurozone. Professionals and investors anticipate that Andrew Bailey’s lead team of policy makers will likely raise interest rates to 4%; the highest in over a decade, for the tenth time in a row.
The first FOMC meeting comes after a buildup of anticipation from traders and investors alike, as the markets await what posture the Fed will take regarding the interest rates; would there be a hike or a cut in interest rates? Recall that the Federal Open Market Committee had previously ended the year 2022 with a 50bps hike, and an indication from Powell, the committee chairman, that the Fed could consider raising interest rates by 75bps in the course of the year 2023.