Oil Turns On a Dime

The final week of H1 comes to an end and it’s certainly been something of a finale for traders. We’ve seen plenty of action this week with a host of big moves and key developments across financial markets. Looking away from the FX space for a change, it seems that outside of the currency landscape, the big move that have captured traders attention this week is the reversal lower in oil prices. Crude prices have sunk almost 8% from the week’s highs following initial strength and there is now chatter of a deeper drop to come. So, let’s take a look at what cause the move and, as ever, if you caught it? Well done! If you missed it? There’s always next week!

What Caused the Move?

USD Rally Weighs on Oil

Following an encouraging start to the week for bulls, oil prices were seen reversing sharply lower mid-week in response to a fresh slew of USD buying. The Dollar was thrust higher on comments from Fed chairman Powell who told the panel at the ECB’s Sintra Forum that the Fed deems the US economy strong enough to be able to withstand a recession. While Powell admitted there are risks, he noted that a recession is not inevitable. Additionally, Powell focused on the need to press ahead with planned tightening in order to tame inflation which was still running at elevated levels. These comments caught the market off-guard given that just the prior week Powell had been warning over recessionary risks. Still, the resultant USD rally weighed heavily on risk assets and sparked a shift in sentiment for oil traders.

OPEC Brings Forward Production Cut Unwind End-Date

The downside sparked by the USD rally was then amplified on Thursday in response to news from the June OPEC meeting. The oil-producing cartel announced that it would ramp up production from its roughly 400k barrels per-day mark to around 650k barrels per day. At this level, the group will bring forward the end of its production normalisation program which was due to end in September, marking the return of 10million barrels per month in supply. With growing fears over a global recession in the offing and supply tightness still an issue, the news was seen adding heavy bearish pressure to oil prices which now look vulnerable to further downside in the near-term.

Technical Views

Crude Oil

The reversal lower this week essentially marks crude’s failure to get back above the broken bullish trend line from YTD lows. With price rejected at the 114.71 level the focus now is on 103.80 support. With both MACD and RSI bearish here, a break of this level raises the risk of a much deeper move towards the next support at 95.93.