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Crude oil faces key demand risks

Fawad Razaqzada Fawad Razaqzada 29/09/2021
Crude oil faces key demand risks Crude oil faces key demand risks
Crude oil faces key demand risks Fawad Razaqzada
…And the OPEC+ might address some of the supply risks next week.

Crude oil turned lower on Tuesday as investors shunned risk after the technology sector led a big sell-off in the equity markets. This morning, prices initially fell further before turning positive again. European equity markets also stabilized somewhat ahead of the US open. The key question as for as crude oil concerned is whether prices have reached at least a short-term top or this is just a pause before we see more gains. My personal view is that I cannot see crude oil prices rising significantly further from here and reckon the risks are skewed to the downside.
 
Why oil has rallied
 
In the US, production dropped due to the impact of the hurricane Ida, causing stockpiles to shrink. Inventories have actually declined across the world amid supply shortages and stronger-than-expected demand growth. Crude has also been supported by the fact the energy sector has been rallying across the board. Scorching hot weather in parts of Europe caused demand for cooling to surge, which, in turn, increased natural gas demand by electric power plants, causing inventories to plummet. As gas prices rose, some factories halted production of things like fertilizers while some switched to oil-fired power generation, boosting demand for crude. Expectations that more companies will turn to oil for power generation has helped to fuel the rally in crude prices.  
 
 
Oil prices face major headwinds
 
 
While oil has had a great year so far, that’s not to say prices will continue rising, as the market is always forward-looking. Looking ahead, I see some potential obstacles that could derail the rally. So, I reckon that the risks are skewed to the downside for oil prices. Some of the reasons why I think that might be the case are listed below:
 
  • Emerging market currency crisis is already being felt in places like Pakistan and Turkey. India could potentially be next. India is the world’s third largest oil importer and consumer, meaning that if the dollar rises against the rupee, it would hurt demand for oi and other commodities as the strength of USD would make imports even dearer.
  • Signs of weakening economic growth in China and the fact they have tapped their strategic reserves indicate demand from the world’s largest oil importer is already negative signs of oil.
  • Supply bottlenecks could undermine the economic recovery in more developed economies.
So, the net result of the above: potentially weaker demand growth for oil in the months ahead and thus lower prices.

What’s more, oil prices have shown the first glimpse of responding to the ongoing risk-off sentiment observed in the stock and FX markets with technology shares tanking and US dollar surging against commodity dollars, emerging market currencies, as well as the pound and euro.
 
With Brent briefly topping $80 a barrel, it looks like investors are realising that oil prices have gotten too strong. It is difficult to justify such prices when stagflation risks are on the rise and there is the potential for the OPEC+ to ramp up its production and allow more barrels to hit the global market to prevent demand from collapsing. As mentioned, demand from India and other major oil-importing nations could suffer as EM currencies weaken against the rapidly-appreciating US dollar.
 
Tentative bearish signs for Brent
 
Finally, from a technical point of view, Brent briefly poked its head above the $80 hurdle on Tuesday but the fact it couldn’t hold there caused a bit of selling which eventually saw prices drop to create a bearish-looking candle on the daily. Time will tell whether this will turn out to be a significant signal. More support levels need to break down for confirmation that prices have topped out. For now, Tuesday’s price action is just a warning sign.

brentSource: ThinkMarkets and TradingView.com
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Meet our contributors
Fawad Razaqzada
×
Fawad Razaqzada
Market Analyst, London

Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms. He leverages years of market knowledge to provide retail and professional traders worldwide with succinct fundamental & technical analysis. Fawad also offers trading education to help shorten the learning curves of developing traders.
 
His colleagues consider him an expert at reading price action on the charts. This together with his deep understanding of economics and fundamental analysis, and trading experience, puts him in a great position to forecast short term price movements. Fawad covers a wide range of markets, including FX, commodities, stock indices and cryptocurrencies and his comments are regularly quoted by the leading financial publications such as Reuters and Market Watch. In addition to ThinkMarkets, Fawad also provides analysis and premium trade signals on his own website at TradingCandles.com.
 
 

Carl Capolingua
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Carl Capolingua
Market Analyst, Melbourne

Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions. Specialising in Australian and US stock markets in particular, Carl uses a top-down approach to assess the global macro picture before using both technical and fundamental techniques to select stocks. He regularly appears as an expert commentator on a number of media outlets throughout the Asia-Pacific region.
 
 
 

Kearabilwe
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Kearabilwe Nonyana
Market Analyst, South Africa

Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives. His career in the financial markets has seen him hold various positions in global investment banks and global CFD and Spread betting firms. He has deep interest in using quantitative methods to help him understand and teach the fundamental drivers of asset prices.
 
 
 

Fawad Razaqzada
Fawad Razaqzada
Fawad is an experienced analyst and economist having been involved in the financial markets since 2010, producing market commentary and research for a number of global FX, CFD and Spread Betting brokerage firms.
Carl Capolingua
Carl Capolingua
Carl has over 20 years' experience in financial markets and has held senior analyst roles at a number of financial institutions.
Kearabilwe
Kearabilwe Nonyana
Kearabilwe is an experienced Sales trader and Analyst specialising in Equity and Equity derivatives.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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