WTI price weakness likely to continue as tensions rise

[MongiIG]

Markets remain increasingly volatile and oil is quick to react to news headlines and sentiment changes.

 

 

Daniela Sabin Hathorn | Presenter and Analyst, London | Publication date: Wednesday 03 August 2022 

Market volatility continues

Markets remain increasingly volatile. This is likely to do with the fact that they are trying to price in a recession, all whilst being convinced that central banks will act accordingly to ease the blow.

This means trading should be focused on tighter time frames as moves are likely to be exasperated.

One asset that is known for being very volatile is oil. The commodity is quick to react to news headlines and sentiment changes, meaning double digit percentage moves are not uncommon.

For the last seven weeks, West Texas Intermediate (WTI) has been stuck in a bear market, taking the price of a barrel from $120 in mid-June to $93 at present. The move downwards hasn’t been perfect, with some attempted bull rallies along the way, but one thing that has been consistent is the fact that price has been stuck below the descending trendline resistance since the highs in June.

Only one, out of the 36 daily candlesticks since the 16th of June, has managed to see a close above that line. That was last Friday, when we saw global equities rallying higher to end the month of July, leading to sentiment in oil also improving.

But Monday brought a reality check and WTI fell sharply back below the trendline, leading to further weakness up ahead. This descending trendline is the first clear sign of resistance up ahead, and it cannot be ruled out until WTI manages to get a few consecutive daily closes above that line. The nearest area to be aware of is the $100 per barrel level, which is both psychologically and technically important.

Fundamentals

Fundamentally, there are many open wounds for oil prices.

On the one hand, the fear of recession is still present, which has been escalated by the mounting tensions between China and the US. There is also the OPEC meeting scheduled for this Wednesday, which is expected to see production increases agreed, softening the price even further.

Inventories have also been rising over the last few weeks, as confirmed by both the EIA and the API data. All of this is likely going to bring further weakness up ahead.

The current price is already sitting around 5-month lows, and there is little support up ahead until it reaches the $85 per barrel area. This means that if the pullback intensifies, we are likely to see any sharp moves washed out by a bearish pattern of lower highs and lower lows.