Oil Slumps To 6-Week Lows
NAGA | Jun 24, 2022 03:49AM ET
Over the past 24 hours, the price of crude oil has reached a 6-week low and is close to completing a 3-week consecutive decline. The price has been partially influenced by technical factors but continues to be driven by certain aspects of the economy and market, which we will examine.
The oil price had declined to $101.064 but has since moved into a symmetrical triangle pattern and is currently hovering at $103.773. Today, the higher is higher than the market open but is showing signs of sellers still being active in the market.
The symmetrical triangle pattern indicates that the trend has lost momentum. Still, it's yet to be determined whether the downward momentum will soon continue or if the price will correct back upwards. This depends on the market developments, but traders need to continue analyzing the price action.
The latest developments that the market is paying close attention to are the oil inventories and the second testimony of the Federal Reserve Chairman. The volume of oil reserves in the USA, as confirmed by the inventories, was 5.607 million barrels which is four times more than what was expected by the market. The news initially triggered an adverse market reaction, but the price has since continued within the sideways symmetrical pattern.
The market participants are also paying close attention to interest rates in the US and India, which are the second and third largest oil importers. Both countries play a significant part in the commodity's demand side, and both appear to be giving hawkish indications.
The Federal Reserve in the US has increased its Fund Rate by 75 basis points, indicating that the next hike may be a further 75 basis points. The Reserve Bank of India has also increased its interest rates to 4.9%, which is the highest since before the COVID-19 outbreak. Again, the RBI has indicated that interest rates are likely to increase as inflation can have a harsher effect on India than in other developed countries.
The rise in interest rates and potential further increases have pressured oil prices as the hikes are aimed at lowering demand. In addition, analysts have also advised that an economic slowdown is likely with inflation likely to cause uncompetitive pricing and with rate hikes decreasing disposable income. oil suppliers and retailers fear this will cause a lower demand and have already stated that the demand is uncertain.
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It should also be noted that most of the market reacted positively to the comments of the head of the US Fed, Mr Powell. The head of the Fed stated that the regulator hopes to avoid a severe economic recession, giving investors hope that demand for oil in the US will not decrease.
However, many economists disagree and have also reacted negatively to specific comments. For example, Mr. Powell noted the regulator's “unconditional commitment to bringing inflation down to 2%” and said, “we will not be able to see maximum sustainable employment.” Both potentially indicate a drop in demand. Traders will continue monitoring the economic activity and growth to evaluate the demand for oil coming from the economy.
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