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Market update: Brent crude oil starts week on the back foot as ‘war premium’ subsides


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The weekend premium was deflated on Monday as markets look to the Fed; oil heads lower after respecting resistance at $89 a barrel and EU data underscores growth slowdown in major economies.

 

original-size.webpSource: Bloomberg

 

 Richard Snow | Analyst, DailyFX, Johannesburg | Publication date: Tuesday 31 October 2023 03:55

Oil starts the week on the back foot

Oil prices were bid on Friday, retesting the $89 per barrel level once again. Two days prior, the same narrow intra-day range was observed between $87 and $89 where prices has remained.

However, today oil dropped sharply back to $87 once it became clear that the war in the Middle East had not escalated to a full ground invasion – a chance markets have not been willing to take. In fact, oil and gold had shown a tendency to rise into the weekend as traders positioned for the worst. Monday then represents a period of reflection and slight relief seeing that a massive operation was avoided or delayed.

Market focus shifts from supply to demand

Oil has also shown a lower sensitivity to news flow from the region after OPEC distanced itself from political responses after Iran called for an oil embargo on Israel. The focus appears to have become less about supply uncertainties and more about waning global demand for oil as major economies struggle under restrictive conditions.

EU data this morning revealed another quarterly contraction in Germany, narrowly avoiding another technical recession after Q2 GDP came in flat. The negative outlook for growth is likely to feed into a lower global demand for oil which may see prices ease into the end of the year.

The 30-minute chart shows the oil price drop on a more magnified level, now testing the $87 level.

Brent crude 30-minute chart

 

original-size.webpSource: TradingView

Brent crude oil technical analysis

The daily chart shows the multi-day consolidation after invalidating the ascending channel. The direction of the commodity remains uncertain as incoming data shifts the focus from one concern to the next. However, oil supply in the region has been unaffected and therefore, concerns linked to the global growth slowdown may soon outweigh supply concerns, placing downward pressure on oil. A tight oil market should ensure prices do not drop too low, possibly facilitating range bound setups.

Brent crude oil daily chart

 

original-size.webpSource: TradingView

IG client sentiment

WTI oil sentiment data below can be used as a proxy for Brent crude oil. US crude: Retail trader data shows 77.02% of traders are net-long with the ratio of traders long to short at 3.35 to 1. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests oil - US crude prices may continue to fall.

IG client sentiment chart

 

 

original-size.webpSource: DailyFX

 

 

 

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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