Supply & Demand Tug of War Continues for Brent, USD Bid

BRENT CRUDE OIL (LCOc1) TALKING POINTS

• FOMC expectations weigh on brent crude.
• Russian oil embargo vs recession fears.
• Brent crude trading below $90.

BRENT CRUDE OIL FUNDAMENTAL BACKDROP

Brent crude oil broke down on Monday as markets brace themselves for a major central bank themed week. Multiple central banks are scheduled to deliver interest rate decisions with focus on the Federal Reserve. With much talk about a surprise 100bps rate hike by the Fed, markets have propped up the U.S. dollar ahead of Wednesdays meeting leaving brent crude exposed to further weakness should the Fed decide on an ultra- hawkish approach.

ECONOMIC CALENDAR

Source: DailyFX Economic Calendar

FED INTEREST RATE PROBABILITIES

Source: Refinitiv

Last week’s data from Baker Hughes shown below reflects the increase in oil and gas rigs both year-on-year and week-on-week increasing, suggesting a forthcoming surge in supply. This data supplements the fall in crude oil prices while recessionary fears linger over the global economy adding further downside risk.

BAKER HUGHES RIG COUNT

Source: Baker Hughes

Learn more about Crude Oil Trading Strategies and Tips in our newly revamped Commodities Module!

From a bullish perspective, the cap on Russian oil proposed by G7 nations may trigger the Russians to react by limiting supply to these nations which could prompt higher crude oil prices. Coupled with OPEC+’s supply cut in October and any upliftment of Chinese COVID-19 policies could further bolster crude oil prices. This being said, my long-term forecast remains skewed to the downside.

TECHNICAL ANALYSIS

BRENT CRUDE (LCOc1) DAILY CHART -UNDATED

Chart prepared by Warren Venketas, IG

Daily brent crude price action shows bulls inability to defend the 90.00 psychological support level with the September swing low seriously under threat at 86.98. Depending on the upcoming Fed decision, a 100bps rate hike will almost inevitably push prices lower.

Key resistance levels:

• 92.90 (61.8% Fibonacci)/ 20-day EMA (purple)
• 90.00

Key support levels:

• 86.98
• 85.00

IG CLIENT SENTIMENT: CAUTIOUS

IGCS shows retail traders are NET LONG on Crude Oil, with 68% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment but due to recent changes in long and short positioning, we settle on a short-term mixed bias.

Contact and follow Warren on Twitter: @WVenketas