Oil prices bounced sharply off their earlier lows, but at the time of writing, both oil contracts were testing some key technical levels, along with the major indices. So, the oil market is not out of the woods just yet.
I think there’s a feeling in the market that the major central banks are going to pause their rate hikes, but that’s not to say the economy will find relief. We have seen some of the implication of higher interest rates on the banking sector already in the last couple of weeks. But the full impact on the economy is yet to become apparent. The general feeling is that global economic activity will slow down as a result of higher interest rates, which should hurt demand for oil.
The fact that WTI has also held below the old support level of $70 is significant in that it will encourage technical traders to maintain a bearish view on oil prices.
The crude oil outlook remains murky, despite the ongoing OPEC+ restrictions.
The impact of very high levels of inflation over the past couple of years has been hurting consumption, while the significant interest rate tightening by central banks have further reduced consumer and business buying power. The full impact of the past tightening has yet to be felt fully on the global economy. There’s hope that with China recently re-opening its economy, demand would accelerate.
On the supply side, no-OPEC production is continuing to rise and is absorbing the pent-up demand from China’s re-opening. The International Energy Agency recently forecast that the global oil supply will “comfortably” exceed demand in the first half of this year.
With the demand outlook uncertain, the OPEC+ decided in November to reduce its output target by 2 million bpd, in what was the largest cut since the early days of the pandemic in 2020. The group plans to maintain this reduction for the whole of 2023. But if the demand outlook deteriorates further, or if non-OPEC supply continues to rise, then the OPEC might have to cut even more production to prevent prices from falling significantly further.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
I think there’s a feeling in the market that the major central banks are going to pause their rate hikes, but that’s not to say the economy will find relief. We have seen some of the implication of higher interest rates on the banking sector already in the last couple of weeks. But the full impact on the economy is yet to become apparent. The general feeling is that global economic activity will slow down as a result of higher interest rates, which should hurt demand for oil.
The fact that WTI has also held below the old support level of $70 is significant in that it will encourage technical traders to maintain a bearish view on oil prices.
The crude oil outlook remains murky, despite the ongoing OPEC+ restrictions.
The impact of very high levels of inflation over the past couple of years has been hurting consumption, while the significant interest rate tightening by central banks have further reduced consumer and business buying power. The full impact of the past tightening has yet to be felt fully on the global economy. There’s hope that with China recently re-opening its economy, demand would accelerate.
On the supply side, no-OPEC production is continuing to rise and is absorbing the pent-up demand from China’s re-opening. The International Energy Agency recently forecast that the global oil supply will “comfortably” exceed demand in the first half of this year.
With the demand outlook uncertain, the OPEC+ decided in November to reduce its output target by 2 million bpd, in what was the largest cut since the early days of the pandemic in 2020. The group plans to maintain this reduction for the whole of 2023. But if the demand outlook deteriorates further, or if non-OPEC supply continues to rise, then the OPEC might have to cut even more production to prevent prices from falling significantly further.
-- Written by Fawad Razaqzada, Market Analyst
Follow Fawad on Twitter @Trader_F_R
