NAGA : Oil is Stable Amid Facing Pressure From Two Directions

The price of oil has remained stable in recent days, amid fears of economic recession and the emergence of a new outbreak of COVID-19 in China. Until recently, the price of Brent and WTI was growing rapidly due to limited supply and logistical difficulties arising against the backdrop of anti-Russian sanctions.

However, some factors negatively affect the commodities market. This may lead to a temporary decline in the price of oil, despite the continuing risks of recession and an increase in the interest rate of the US Federal Reserve.

What's happening in the oil market?

The market was rattled earlier in Monday's session by the news that China had discovered its first case of a highly transmissible, Omicron subvariant in Shanghai that could lead to another round of mass testing, which would hurt fuel demand.

As you may recall, previously when new strains of COVID-19 were detected, markets reacted negatively and the price of oil temporarily declined. We could potentially see a pattern now, as markets are spooked by the risks of another quarantine restriction and reduced energy demand in China. This could lead to a surplus of oil, despite limited exports from Russia, which previously led to an increase in the price of black gold.

"The oil market is being pulled in two directions, with exceedingly tight physical fundamentals set against forward-looking demand concerns and signs of price-induced demand destruction," Analyst at EBW Analytics said in a note.

Also putting pressure on oil was a rise in the U.S. dollar against a basket of other currencies to its highest since October 2002. A stronger dollar reduces demand for oil by making the fuel more expensive for buyers using other currencies.

What should we expect oil prices to be?

Macro risks are becoming more two-sided. A 3 million barrel (bbl) per day retaliatory reduction in Russian oil exports is a credible threat and if realized, will drive Brent Crude Oil prices to roughly $190/bbl.

On the other hand, the impact of substantially lower demand growth under recessionary scenarios would see the Brent Crude Oil price averaging around $90/bbl under a mild recession, and $78/bbl under a scenario of a more severe downturn.

Such forecasts were made by J.P. Morgan days earlier in view of the current bipolar situation in the oil market.

Brent oil price hourly chart, July 12, 2022.

At the moment, the price of oil has been holding at $105 for the last 5 days. Further developments will depend on factors such as Fed key rate increase, aggressiveness of new COVID-19 strain spreading in China and risks of global recession.

It is especially important to consider all macroeconomic and fundamental factors in order to build the right trading strategy for commodity assets.

Today's Oil Summary

• The oil price has remained stable in recent days.
• The oil market is being pulled in two directions, with exceedingly tight physical fundamentals set against forward-looking demand concerns and signs of price-induced demand destruction.
• Oil prices will depend on factors such as Fed key rate increase, the aggressiveness of new COVID-19 strain spreading in China, and risks of a global recession.

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