Energy markets could be key in driving another market collapse

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Energy prices will prove key for market sentiment, with the OPEC driven rise in crude prices bringing risk of a market collapse if inflation turns upwards once again

Source: Bloomberg

 Joshua Mahony | Senior Market Analyst, London | Publication date: Monday 10 October 2022 

OPEC+ defy Biden administration in a bid to drive up energy prices

Last week saw an unexpected two million barrels per day production cut announced by OPEC+, driving the price of crude higher as a result. The Saudi decision to work alongside Russia in a bid to raise prices rather than side with their apparent allies in the US drew ire from Biden. Crucially this move seeks to lift Russian income whilst lifting inflation to the detriment of the West. We are yet to ascertain whether this will truly have a lasting impact on energy prices, but there is a distinct risk that any major uptick in crude, gasoline, and natural gas prices does damage market sentiment given the implications for inflation. The chart below highlights how we have started to see the year-on-year comparative drive inflation lower as the price of crude drifts back down towards levels seen last year. The impact of energy prices on the wider CPI reading is highlighted, with the declining year-on-year energy component helping to drag inflation lower. However, that signals the importance in keeping the price of crude as low as possible in a bid to drive down CPI and allow central banks to cut rates once again.

Unfortunately, the actions of OPEC signal a desire to do quite the opposite, with a oversized production cut bringing fears that they will continue to act in a bid to drive up prices. As things stand, higher energy prices promise to elongate this crisis as central banks maintain elevated interest rates in a bid to drive down inflation. Thus, it will be crucial to note how a significant uptick in energy prices could cause another sharp decline across risk assets in favour of the dollar.

Crude oil

OPEC managed to drive a sharp move higher for Crude, with the weekly gain representing the best performing seven-day period since February. From a wider perspective, we can see how this brings the long-term uptrend back into play. The recent pullback into 76.4% and 100-SMA support did raise questions over whether this bullish trend would come back into focus, and initial signals appear to be supporting that notion. Nonetheless, a rise through $103.45 would bring greater confidence that another leg higher is coming into fruition.

Source: ProRealTime

Natural gas

Natural gas prices has similarly been on the back foot, as fears around a European crisis throughout winter ease thanks to an impressive push to top up stockpiles. However, with Europe increasingly relying on LNG imports from the US and Asia, the price of gas is likely to remain supported before long. The US natural gas market has dropped back into a key support level just like Brent crude, with the weekly chart highlighting how we have started to stabilize at the confluence of trendline and Fibonacci support. With that in mind, this looks to be another source of concern if we see natural gas price turn upwards in a bid to continue this long-term uptrend.

Source: ProRealTime

Summary

Energy markets should be at the front and centre of every investor’s minds given the impact it has upon inflation expectations. The ability to drive down energy prices will be key to ending this crisis quickly, but an upturn for natural gas and crude could spell trouble for market sentiment. The dollar stands to benefit from such an environment given its haven standing and elevated Fed Funds rate. Meanwhile, the inability to keep energy prices depressed could spark another bout of downside for equity markets.