Crude Oil Prices May Crash from Highs if Russia, Ukraine Crisis Ebbs

[MongiIG]

CRUDE OIL OUTLOOK:

• Crude oil prices soar to 14-year high as global markets shun Russian supply
• All sides of the conflict may be keen for hostilities to end relatively quickly
• Markets at sentiment extremes may overshoot on the downside as crisis ebbs

 

Crude oil prices continue to race higher as mounting sanctions against Russia punishing it for the invasion of Ukraine make its vast energy exports inaccessible on global markets. The Eastern giant accounts for just over 13 percent of worldwide crude supply, making it the second-largest producer after the United States.

Headlines tracking the ongoing conflict remain in focus. With Kremlin and Kyiv making little progress in initial talks and Russian forces attempting to press on despite mounting difficulties at home and on the ground, the specter of still-more biting Western countermeasures is keeping supply disruption fears alive.

Dramatic backwardation – reflecting outsized remand for crude deliveries sooner versus later – speaks to potent upward pressure that is unlikely to give way until signs of de-escalation start to appear. As argued previously, parallels between this episode and the 2008 Russo-Georgian War hint this may happen quickly.

CRUDE OIL PRICES MAY CRASH AS RUSSIA-UKRAINE CRISIS EBBS

Moscow’s actions thus far suggest its appetite might be limited to a buffer zone in the breakaway Luhansk and Donetsk regions of eastern Ukraine. Capturing territory beyond these areas may be aimed at having something to trade in the inevitable ceasefire negotiations.

Ukraine’s impressive effort to frustrate the Russian advance, as well as a series of operational miscalculations by the invaders, may have somewhat prolonged hostilities by denying Moscow the strong negotiating position it is likely seeking. The pain from sanctions is mounting however, so time to regroup is running out.

With that in mind, Russian President Vladimir Putin could be searching for a way to disengage in the relatively near term. It may be mutually acceptable for Russia to pull back to its pre-war borders in exchange for Ukraine and Western powers agreeing to discuss the status of Luhansk and Donetsk “later”, at least for now.

Crude oil prices and other commodities buoyed by crisis-driven supply fears – like wheat, corn, nickel, zinc and aluminum – may rapidly retreat if echoes of such a thing begin to circulate. The likelihood that markets overshoot “fair value”, swinging from one sentiment extreme to another, may translate into an eye-watering collapse.

 

CRUDE OIL TECHNICAL ANALYSIS

The WTI contract is testing long-standing range resistance in the 107.68-114.83 zone. Securing a break above this barrier may set the stage for a test above the $120/bbl figure. Neutralizing upward pressure in earnest probably demands retreat back below 95.34, a move breaking the near-term uptrend from early December 2021.

Weekly WTI crude oil price chart created using TradingView

CRUDE OIL TRADING RESOURCES

• What is your trading personality? Take our quiz to find out
• See our guide to build confidence in your trading strategy
• Join a free live webinar and have your questions answered

--- Written by Ilya Spivak, Head Strategist, APAC for DailyFX. 3rd March 2022