Oil pressure is building: What’s driving the price?
By Paul Reid
27 July 2023
Financial media channels haven’t had oil on their radar for a while, but black gold is finally back in world headlines. A gradual 16% rise from $67 (USD) per barrel to $79 this month has prompted stories of rising demand. But is it a new bullish trajectory, or just a temporary uptick within the price range?
Oil trading in 2023
Looking at the big picture, oil has been bearish since March 2022, but if we zoom in on this year’s charts and analyze price action on a month-to-month basis, we see a stable pattern. Traders buying at $60-$70 and selling at $80-$90 have seen consistent and repeated profits throughout the year, with very little breakout action to threaten the dreaded stop out.
Even when oil prices moved out of the range, the reasons were relatively simple to track and even forecast. In 2023, the two biggest influences on oil prices have been production cutting announcements and recessionary fears, and both are on the rise right now. Will the bull overpower the bear in Q3, 2023?
Production cuts feed the bull
In June, OPEC slashed Nigeria's oil output to 1.38 million barrels per day (bpd) from 1.74. Saudi Arabia’s 1 million bpd production cut announced in June, will likely go ahead in August. And Russia plans to curb production by 500,000 bpd within the next two months. Scarcity fuels price hikes, so there are strong reasons to favor the bull.
Moreover, according to Goldman Sachs' head of oil research, Daan Struyven, the third quarter of 2023 is expected to be accompanied by sizable deficits in the market, reaching as high as 2 million bpd.
This supply shortfall forecast has prompted articles circulating about Brent crude prices hitting $86 per barrel by the end of the year. This optimistic hike is pure speculation, and traders should not consider that price a reliable trajectory; more of a suggestive level where a new range may form.
In short, demand is rising and supplies are falling, so Q3 might be a big revival for oil, but the other strong influence still looms — and past events proved catastrophic for long oil traders.
Recessions poke the bear
Recessions or downturns are very influential on the markets too. Oil was bullish in the first years of the 2000s, and in 2007, the world saw an epic 147% rally to $141 per barrel. The pre-recession bull was the talk of the trading floor, but in 2008, crude tanked 78% down to $42 per barrel and oil investors everywhere lost their shirts.
Fast forward to 2023, where treasuries and governments are in denial about the world possibly entering into what some fear could be the biggest recession in a century. World leaders say their economies are fine, and yet people of all nations are already feeling a pinch in their pockets similar to the 2008 correction. Some say we are already in a recession, and history will record 2023 as the year it began, but we’ll all have to wait and see about that.
If this year really is the starting point for a big downturn, oil could crash like last time, overriding any supply or demand influences, so due diligence and deep analysis is strongly recommended on the day you choose to trade oil.
There’s a lot of mixed sentiment surrounding oil right now. Exness market sentiment, at the time of writing, puts oil trading close to 50/50 buy/sell. This is no doubt caused by the conflicting global circumstances and lack of media coverage, but expecting demand to rise seems to be the consensus.
The International Energy Agency predicts a 2.4 million barrels per day increase in oil demand over 2023, surpassing last year's growth. Furthermore, the secretary general of the International Energy Forum, Joseph McMonigle, forecasts that India and China will account for a combined 2 million barrels per day demand surge in the second half of 2023.
But trade with caution. USOIL production has risen to 12.7 million barrels per day over the past 12 months and may counteract future supply and demand dynamics. In addition, last year’s market flood of US shale oil may get a boost, especially if the supposedly forthcoming BRICS currency challenges USD domination, which would further dilute prices.
And if recession confirmation starts circulating in the media, investors may jump ship, expecting prices to sink to the bottom once again.
One more thing: if you are seeing stories about a global reduction in fossil fuel use and are factoring them into your trading strategy, don’t fall for the propaganda. The world is years away from transitioning to clean energy alternatives. No nation has the infrastructure to go completely green yet, and no country is capable of footing the mammoth bill associated with it — no matter how many people glue themselves to the roads. It’s simply not happening any time soon.
Keep a close eye on financial channels. Media hype will probably be the first catalyst to break today’s oil price equilibrium.
Installing the Exness Trade app will provide breaking news and price notifications wherever you are, and also give you the freedom to trade without delay when all the signals are green. Be ready for a crude awakening, and trade informed with the help of Exness.
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.
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