Crude oil prices rose sharply last week with Brent climbing just shy of 8% and WTI adding more than 8% as priced ended a run of 6 consecutive weekly falls. At the start of this week, however, prices have fallen once again, shedding nearly 1% at midday in London.
It looks like
Covid is once again the culprit as the rapidly-spreading
Omicron variant raises serious concerns over demand for crude oil as countries go back in partial or full lockdown. Even milder restrictions such as working from home reduces oil demand as people no long commute to work. Omicron is spreading fast. In the UK, for example, the rate has been doubling for several days as Prime Minister Boris Johnson warned of a “tidal wave” of infections from the new strain. At least 30 states in America have reported cases of omicron. The only positive thing about Omicron I suppose is that there
hasn’t been much in the way of evidence that it is causing severe disease. That is keeping investors confident that we hopefully won’t see similar lockdowns like we did in 2020.
That also explains why oil prices managed to bounce back last week. But the
path of least resistance is likely to be to the downside for a while, even if we don’t see significant falls in oil prices.
In addition to the impact of omicron, demand concerns are on the rise due to
struggles of some
emerging market economies and oil consumer nations. The
Turkish lira, for example, has fallen to a fresh record low as investors prepare for yet another rate cut from the CBRT this week, while the Indian rupee has fallen for the last 6 weeks.
Today’s selling is also driven in part by
technical selling.
Brent oil has turned lower after testing the underside of the broken trend of the channel:
On the daily time frame, one can see that as well as the trend of the channel around $76, Brent faces further resistance here from the convergence of the 21-day exponential moving average and the 50% retracement level of the entire recent drop:
With several technical levels converging around $76, I am not surprised at all with the selling pressure, especially in light of the above macro factors.
From here, it looks like Brent oil could be heading back down to around $73, where the 200-day average is coming into play.
Source for all charts: ThinkMarkets and TradingView.com