Crude oil prices are continuing to struggle. Optimism over the re-opening has been replaced by concerns over demand, at a time when OPEC+ nations are slowly increasing oil production. Are we about to see oil prices take a tumble?
As US covid death rates continue to rise, we have seen consumer sentiment turning sharply lower – as evidenced by the UoM’s survey dropping to a 10-year low – while economic activity has started to deteriorate, with the Empire State Manufacturing Index dropping sharply on Monday. Today, we learnt that headline retail sales slumped 1.1% in July when a much smaller decline was expected. Admittedly, the report showed further gains for sales at gasoline stations, it is important to note that this happened during the peak of the driving season. Fuel demand could easily fall back if the US were to impose some restrictions due to the covid situation.
Meanwhile, other parts of the world – including some oil consumers nations – have been forced to introduce restrictions amid covid resurgence. New Zealand is back in lockdown, even though there was just a single virus case there. Clearly, the NZ government doesn’t want to face similar problems as neighbours Australia or elsewhere such as Japan and Hong Kong.
Growth at the worlds’ second largest economy is also slowing down. On Monday, fresh data showed that Chinese retail sales growth slowed to 8.5% y/y in July compared to 12.1% the month before, easily missing expectations of 10.9%. Likewise, industrial production came in much weaker than expected. A slowing Chinese economy is never good for commodities, especially crude oil.
Technical outlook
From a technical point of view, the weekly chart of WTI paints a bearish picture:
Source: ThinkMarkets and TradingView.com
As can be seen, it has already broken its bullish trend lines going back several months. Furthermore, the bullish price candles observed in recent weeks have proved to be traps for the bulls, such as the one circled (hammer). So far, though, support at $64.60ish, which was last year’s high, has held firm. But the bounces off this level have been progressively shallower, suggesting the bulls are losing control.
On the daily time frame, the technical picture does not look much different:
Source: ThinkMarkets and TradingView.com
It looks like price is gearing up for a breakdown of support, possibly leading to a drop to the next demand zone in the $64 area next.