Oil price drop on demand concerns despite ongoing geopolitical tensions
Has the oil price found support around technical levels as a possible breakdown of Middle East ceasefire talks is propping it up?
Oil price declines on demand worries despite ongoing geopolitical tensions
Crude oil prices were set for yet another weekly loss as demand concerns continued to pressure traders, offsetting lingering supply worries stemming from geopolitics.
Both Brent crude oil and West Texas Intermediate (WTI) crude oil since last Friday saw four consecutive days of falling prices and were on track to finish the week lower than where they started. Weighing down on oil was disappointing economic data pointing to slackening global demand.
Manufacturing readings from major markets in Europe, Asia and the United States indicated slowing demand for industrial products. This translates to softer demand for energy inputs.
In the US, the Purchasing Managers' Index (PMI) for July dropped to its lowest level in eight months. The eurozone PMI extended a two-year contractionary trend, underscoring weakening economic momentum in the bloc.
China's official PMI dipped below the 50 threshold demarcating growth and contraction. The world's second-largest economy has been hobbled by its strict zero-Covid-19 policies and a deepening real estate crisis.
Adding to demand concerns, the US Labor Department had to sharply revise down non-farm payrolls data. Over the year to March 2024, the US generated over 800,000 fewer jobs than initially estimated.
As the largest global oil consumer, economic health and labour market strength in the US have significant implications on fuel and energy demand worldwide.
The downward revisions stoked fears that the Federal Reserve's (Fed) aggressive monetary tightening campaign may tip the economy into recession, further eroding oil consumption.
Despite the demand-related pressures, ongoing geopolitical flashpoints continue to stoke anxiety over strained supplies. However, pessimism over consumption trends has overridden supply fears of late.
The downward momentum makes it increasingly likely that OPEC+ will have to scrap plans to continue gradually ramping up output when it meets in October.
While geopolitics and the so-called war premium remains embedded into oil prices, ceasefire talks between Israel and Hamas have stalled.
According to Reuters, Israel's push to keep forces stationed in Gaza post-truce is the latest obstacle to progress. Hopes are dimming for a swift resolution to the conflict, propping up the oil price over the past day or so.
Overall, oil markets remain caught between two competing forces. Worries over a demand slowdown are tipping the scales bearishly for now but the potential for geopolitical flare-ups and supply shortfalls continues to provide some support.
Technical analysis on WTI
WTI seems to have once again found support in the $72.50-to-$71.50 per barrel region, as it did in June and early August. Were this support area to give way, though, the psychological $70.00 mark and December 2023 low at $67.74 would be back in sight.
WTI weekly candlestick chart
The fact that positive divergence can be made out on the 9-day Relative Strength Index (RSI) – whereby this week’s oil price low has not been confirmed by the oscillator which instead made a higher low – points towards at the very least a minor recovery rally being seen. Positive divergence has a probability of working around 70% of the time. Such a countertrend move would be confirmed by a daily and weekly chart close above Thursday’s $73.48 high.
WTI daily candlestick chart
If so, the 200- and 55-day simple moving averages (SMAs) at $77.77-to-$78.73 would be back in the frame, together with the mid-August peak at $80.13.
For a more significant medium-term bullish reversal to become possible, a daily chart close above the current August high at $80.13 needs to be seen.
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