WTI on course for worst month since November as fundamental drivers decay

After six months of consecutive gains, WTI crude oil is on pace to weaken by over nine percent this month. That would be the worst performance since November 2021 if it holds. In fact, on Wednesday the commodity closed at its lowest since early May. Is there more scope for energy prices to weaken ahead? Or will this translate into another bounce in the coming weeks?

Broadly speaking, WTI has been on an impressive rally that has its beginnings going back to when prices found a bottom in 2020. Then, a global pandemic destroyed travel demand, plunging oil prices to lows not seen in decades. Since then, recovery from a period of lockdowns, plentiful government stimulus and geopolitical tensions in Europe have worked in unison to bolster prices. Things are seemingly turning.

Some of the highest global inflation in decades has resulted in central banks around the world tightening monetary policy. To bring down rising prices, they must slow down growth by raising interest rates and ending government asset purchases. Unsurprisingly, real 2022 global growth estimates have been falling. On the chart below, growth is now seen at 3.2% y/y versus 4.5% expected back in late 2021.

This is a clear downside risk to oil amid rising recession concerns. Meanwhile, the Organization of the Petroleum and Exporting Countries and allies (OPEC+) have been gradually restoring supply – see chart below. By August, the last of the production cuts made back in 2020 is expected to be rolled back. Barring an escalation of tensions between Russia and the West, it seems that the tide may be turning for crude oil. With that in mind, what are key technical levels traders should watch for?

Crude oil fundamental drivers – global growth, OPEC output

Crude oil technical analysis

Crude oil prices have broken under a key rising trendline from December – red parallel lines in the chart below. A confirmatory secondary close below could open the door to reversing more of the 100% rise from the end of last year through late February. Below, the 92.95 – 95.11 support zone will be key to watch as the 200-day Simple Moving Average nears. Clearing the latter opens the door to retesting the 85.38 inflection point. Otherwise, a turn back above the trendline could hint at uptrend resumption.

Daily chart

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