Oil markets are in downtrend; Saudi’s may choose to cut production

  • UKOil
  • USOil

The weekly charts of UKOil and USOil show downtrends, with both instruments charting lower peaks followed by lower troughs. Moreover, each instrument's stochastic is below the 20 levels (green rectangles). These levels indicate a substantial underlying bearish momentum. The longer the oscillators maintain these levels, the greater the chance of lower energy prices.

This situation is a significant change from the period following Russia's invasion of Ukraine. Then, the geopolitics introduced a supply shock expectation which drove UKOil to a high of $133 and USOil to $129. However, since then, UKOil has dropped 30% to trade at $93, and USOil has declined by 32% to $87.

A worry is that the drop in prices is associated with demand destruction instead of supply coming back online. The US has already printed two consecutive quarters of contraction and is in a technical recession. Moreover, recession fears abound, with Europe particularly susceptible.

A possible response is for OPEC+ to cut back on production to support the market. This scenario is a distinct possibility as Saudi Arabia might want to send a message about dealing with Iran. Given this possibility, a stochastic above 20 may lock in a near-term bottom if there is a production cut.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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