Forex Trading Library

Can Crude Find Upside Now?

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The price of crude has been on the backfoot since the summer, when WTI made a run at $100/bbl. Despite the war in the Middle East and increased production curbs from OPEC+ members, the price kept going down. That is, until now. But are we looking at a short-term bump, or has the price of crude bottomed out?

Understanding the Fall can Explain the Rise

There were a couple of other more technical factors that should have supported crude over the last few months, but apparently didn’t. The growing expectation that US yields would start to ease caused the dollar to generally decline against its peers. Typically, a weaker dollar means increases for commodities that are priced in it. But that didn’t happen with crude. And that could be a complication for an expected rebound at the moment.

Experts tend to disagree on what the main driving issue is for lower crude prices. Many in the market point to fears over demand. Sluggish economic performance and a strong push by governments to replace fossil fuels would suggest demand will be weaker in the future. But OPEC disagrees with that assessment, implying that an exaggerated perception of slow demand is putting downward pressure on the commodity. In other words, they are still blaming speculators trying to push the price down.

Seeing Green Shoots?

There might also be an issue with timing. While the global economy is expected to experience a rebound in the next year, the winter is still seen as complicated. Europe, one of the larger buyers of crude on the international market now that it isn’t relying on established contracts with Russia, is expected to stay in recession for the next quarter at least.

The largest importer of crude, China, is forecast to experience a more mild winter this year, which would reduce demand for heating. In fact, so is the whole of the northern hemisphere, with temperatures in most of the Continental US expected to be as much as 2 degrees higher on average. Europe is also expected to see a more mild winter due to changes in the jet stream and effect from La Nina. That would further reduce demand for crude in the short term, which is when the most traded contracts currently end.

The Big Boost

Crude’s big gain this week has come on the back of the Fed’s rate policy. The weaker dollar and falling yields combined with the expectation that rate cuts in the future will keep the US economy growing. But the quantitative easing announced by the ECB and the BOE refusing to rule out more rate hikes provided a less dovish global central bank perspective. While the US as the largest consumer might prop up the price the crude, global demand trends might leave the rebound in prices weakened.

However, we are heading into a usually more optimistic period for the markets. That might allow the gains in crude to be sustained for the next couple of months as investors look more hopefully towards growth. The Fed’s recent increase in its forecast for Q4 GDP growth in the US certainly helps. But the pivot towards easier policy by the FOMC was generally already expected, so the fundamentals for oil haven’t drastically changed since when it was trending lower.

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