Oil futures have suffered five intense corrections in the last seven trading days. Some of these declines have reached 3%, as was the case last Friday. The surprising weakness in oil demand in China, the expectation of a start or end of OPEC cuts (which remains to be seen), rumors of a drop in Saudi crude oil prices and the production boom in several American countries are generating significant turbulence in the crude oil futures market, even if until a few days ago the dominant factors (Libya, geopolitical tensions or Iraq’s plan to compensate for months of excess production) were bullish for “black gold”. Without going any further, this Tuesday, Brent crude oil, the benchmark in Europe, went into the red and its price is approaching a critical point in technical analysisCrude oil risks a further 10% drop if it breaks through this zone.
Oil futures corrected by more than 2% on Tuesday, leading to the Brent crude is expected to hit an annual low of $75.58 a barrelOil has not touched this price zone since early December 2023. The loss of $76 reinforced investor selling, which partly explains the declines on the day.
The surprise in the markets is seen in the comments of analysts who predicted a much higher crude oil price or at least around $80 due to the interruption of production in Libya, one of the African countries. leading the pumping of crude oil with an average production of one million barrels per day. Not only Libya, Iraq and Kazakhstan plunged into personalized budget cuts plan production after months of OPEC quota jumps.
As if that wasn’t enough, The International Energy Agency had predicted a recovery in demand in the second half of the year (a recovery that is increasingly uncertain)while geopolitical tensions remain very high, both on the European front (Russia-Ukraine) and in the Middle East (Israel-Palestine-Iran). But the reality is that the price of oil is falling sharply, “throwing a cable” to the central banks of developed countries that want to lower interest rates with guarantees. If oil continues to fall, the ECB or the Fed will be able to announce their reductions with some relief. The bearish factors or forces for oil seem to be predominant in a clash of “contradictory forces” what the economists of BCA Research highlighted a few days ago in a report intended for their clients.
In technical analysis, this often reflects market fundamentals or parts of them, i.e. what is happening in the “real world” with supply, demand and all the factors that can move the price of Brent crude oil. The $76 support (at least intraday), and is now approaching a really critical point, a key support that, if broken, would lead to further declines in the price of crude oil.
The beginning of the end of the cuts
If OPEC finally complies with the established plan, the cartel will begin to gradually put back on the market the 2.2 million barrels of voluntary reductions that remain in force today. In October, eight member countries of the cartel are expected to “release” 180,000 barrels of oil per day. Month after month, this figure will increase until it reaches 2.2 million barrels already in 2025, which would leave an oil market well supplied or even with a surplus (more supply than demand) if an unexpected shock does not occur.
Commerzbank analysts also express their surprise at the drastic downward movements of oil in a market that does not yet have sufficient reasons to be so bearish. Nevertheless, the experts of the German bank try to explain why the sentiment has changed so much in such a short time towards crude oil: “On the one hand, it is not possible to calculate how long the production losses in Libya will last (the UN is already trying to do so). On the other hand, no one really knows whether Iraq (and Kazakhstan) will actually compensate for the overproduction in September and reduce their production, while it is not possible to believe that global oil demand will actually recover abruptly; half of the year, as the International Petroleum Agency (IEA) has assumed so far.”
In its August report, it predicted that global oil demand would be more than 1.5 million barrels per day higher than in the first half of the year. However, Chinese imports, which are currently virtually frozen, are particularly sceptical: the poor state of Chinese industry does not give hope for a rapid recovery. “As a result, there is a risk that OPEC+ will pay for its strategy of returning barrels to the market in the form of significantly lower prices,” says Commerzbank.
This is something that Saudi Arabia has already begun to absorb, considering lowering the price of its oil to compete in a better supplied market (with abundant supply). Even though Riyadh is one of the biggest victims of the cuts (it produces nine million barrels a day when it has the capacity to pump 12 or 13 million), generally prefers the crude oil market to operate with a slight supply deficit, which forces a drop in stocks (accumulated oil and refined products), causing a rise in prices. This time, Riyadh could give in and allow an increase in supply and a consequent drop in barrel prices.
THE Expected price cuts range from 50 to 70 cents per barrelreflecting weak refining margins in China and an increase in OPEC+ supply. Furthermore, according to sources consulted by ReutersThe price drop comes at an unusual time: “Margins are bad in general and worse in China,” one of the sources said, adding that September, which is usually the best month for oil demand, but this year could disappoint, could also be behind the reduction in Saudi crude.
Oil faces 10% drop
Overall, it is now necessary to pay close attention to the movements of crude oil, because investors, always attentive to technical analysis, can exacerbate oil losses with their movements: “Technically, it is important to pay attention to the evolution of the oil price. Crude oil is the future of Brent in the short term, since it is testing the strength of the key support that it finds at $72-74. The maintenance of this support depends on the risk of being able to witness a broader corrective process, which is located at $72-74. In the worst case, the absence of an increase in cases could bring the price of Brent to $55, which would confirm if a decline breaks through supports at $67, 10% away and that would be the minimum target of falling to miss 72-74 dollars,” Cabrero explains.
Moreover, on August 27, the dreaded “death cross” on the price of oil was confirmed. This is a a bearish chart trend occurs when a slower moving average crosses above a faster moving average, the 200 and 50 simple moving average being the most commonly used combination to track “death crosses”. In this case, that is exactly what happened, the 50-session moving average crossed above the 200-session moving average to the downside.
Brent is one of the main types of crude oil used as a benchmark in global oil markets. This benchmark crude oil is considered a light and sweet oil, meaning it has a low sulfur and easy to refinecharacteristics that make it particularly valuable for the production of gasoline and other refined products. For this reason, its price usually serves as a guide for all regional or national references, explains Joan Cabrero, advisor to EcoTrader in statements to elEconomista.es
The price of Brent is a key indicator of the global economy, affecting energy costs, inflation and the profitability of companies in many sectors. A good example is the fall suffered by the Spanish Repsol on the stock market this Tuesday, which fell by up to 2% due to the drop in oil prices.
