Oil Under Pressure

In many respects, it’s been a much quieter week for financial markets. While we’ve seen some key developments by way of Fed commentary, the UK budget and various headlines from the G20 meetings, we haven’t seen the sort of volatility we’ve noted in recent weeks. The US Dollar sell off pausing this week was a key source of the congestion we’ve seen across many markets, with traders awaiting the next clear directional cue.

However, there have been big moves nonetheless and this week commodities have seen the clearest pushes. In particular, the move that seems to be capturing the most attention amongst the traders I’ve spoken with ahead of the weekend is the almost 10% sell off in crude. So, let’s take a look at what caused 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 Stabilisation

 Part of the sell off this week was fuelled by the stabilisation in the US Dollar. USD had been heavily sold over the prior week and began this week under offer. The recent weaker-than-forecast October inflation report in the US had seen USD well sold, coming under further pressure from dovish Fed commentary at the start of the week. However, into the middle of the week, the USD decline dried up as Fed comments turned more hawkish. Some Fed members argued that one encouraging inflation report is not enough to cause a shift in Fed policy and called for further hikes.

OPEC Cuts Demand Outlook

Along with the stabilisation in USD this week, oil prices have also been hurt by OPEC slashing its demand forecasts for the year ahead. In its latest outlook issued this week, OPEC cut its global oil demand outlook for the 5th time this year, since April, citing huge global uncertainty. OPEC now forecasts 2022 oil demand to average 2.25 million barrels per day, down 100k barrels per day since the last outlook.

Looking ahead OPEC noted that "Downside risks include high inflation, monetary tightening by major central banks, high sovereign debt levels in many regions, tightening labour markets and persisting supply chain constraints."

China Fears

Finally, fears over the risk of fresh lockdowns in China are also weighing on oil prices. With the country yet to abandon its zero COVID policy and with cases there rising, oil traders fear the return of stay-at-home orders which would massively disrupt demand as we saw earlier in the year.

Technical Views

Crude Oil

 The failure at the latest test of the 93.32 level has seen crude prices turning sharply lower. The market recently broken down through the key support level at 85.53 and is now fast approaching a test of the 79.21 level and rising trend line from Q4 2021 lows. A break here will be troubling, opening the way for a deeper push towards 73.16 next.