Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Oil: Forget Year-End Forecast Of $65; Will We Get To $85 Soon?

By Investing.com (Barani Krishnan/Investing.com)CommoditiesJul 06, 2022 04:16AM ET
www.investing.com/analysis/oil-forget-yearend-forecast-of-65-will-we-get-to-85-soon-200626728
Oil: Forget Year-End Forecast Of $65; Will We Get To $85 Soon?
By Investing.com (Barani Krishnan/Investing.com)   |  Jul 06, 2022 04:16AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

Citigroup says oil could collapse to $65 a barrel by the end of this year and slump to $45 by end-2023 if a demand-crippling recession hits. 

Let’s not go that far. Will we get to $85 before the end of July?

Crude prices tumbled more than $11 a barrel during Tuesday’s lows as deepening fears of a US recession pushed oil markets to one of their worst trading days since the Ukraine conflict triggered highs in March.

The dollar's surge to two-decade highs also incentivized selling in oil, which tends to attract less buying from non-US entities when the value of the greenback surges.  

However, no sooner had the price of a barrel broken below the $100 mark—the key to the conviction of oil bulls—some of the voices cheering Tuesday’s collapse from the sidelines posited that perhaps crude had been oversold.

The misgivings are understandable. The 'higher and higher' mantra has become institutionalized for oil prices, the same way as 'lower and lower' was two years ago. 

Back in 2020, it was demand destruction from COVID that ultimately canceled tens of billions of dollars of investments in oil exploration projects and refining projects we are paying for in cost today. 

Since 2022 began, the narrative in oil has either been 'Russia, Russia, Russia' (sounding like the rant of a one-time president), the folly of clean-energy policies unfriendly to fossil fuels or OPEC+’s virtually impossible task in meeting the production targets set by its Saudi masters.

Amid such mindsets, enters the R-word. The last time a recession was in our midst, it was at the height of the COVID outbreak. But it was brief, so brief that officially, it was estimated to have lasted just about two months—March through April—before demand came surging back for most goods and, eventually, oil. 

There was good reason for such a lightning recovery in sentiment. The Federal Reserve was hosing down the fires of the pandemic then with a river of easy money, on top of interest rates almost at zero—setting up the catalyst for today’s inflation headache.

This time, there just can’t seem to be any agreement on how long and deep the recession would be and whether there’d even be one. 

Under Close Watch: Fed Meeting Minutes, US Jobs Data

The drone of recession talk is, nevertheless, expected to get louder across the US after the Atlanta Federal Reserve’s forecast on June 30 of a second straight quarter of economic decline for the year. Some say the Atlanta Fed is prone to rewriting its forecasts all the time—indeed, its projection is called GDPNow, meaning it’s a call that can change by the day—and that the final reading for Q2 GDP could actually be positive.

Others say the US may be witnessing the beginnings of a real economic shakedown, only that it’s been too numb to notice because of the miraculous resilience of its consumers insulated by two years of pandemic aid money; a housing market still running on old stimulus energy and stock markets often coming back after a few days of sell-offs.

Deepening worries about a recession could weigh on the demand outlook for oil this week despite tight supply concerns and prospects of US job gains in June.

June's nonfarm payrolls are expected to have slowed from May, but remaining in solid, positive territory. Economists tracked by Investing.com say some 268,000 payrolls were probably added last month—versus the 390,000 in May—holding unemployment at 3.6% for a third straight month. A jobless rate of 4% or below is seen by the Fed as full employment.

There is a very close nexus between oil prices and US jobs data. The relationship is quite simple: people need to commute to work (at least those who don’t work remotely) and they need to either drive or rely on public transport. Whatever the mode, oil is needed for that. Also, when jobs—and wages—numbers are good (as they have been for a long time), Americans literally go the extra mile in discretionary travel, i.e. with road trips and flights to far-away holiday destinations. Gas prices stubbornly at north of $4.50 per gallon could chip away at some of that road travel, although the evidence of that has so far been thin.

Wednesday’s minutes from the US central bank’s June meeting will give investors some insight into how policymakers see the future path of interest rates as markets remain focused on the prospect of a recession. The Fed is expected to push ahead with another 75 basis point rate hike at its upcoming July meeting, but the path for September is less clear.

“I think the market is caught between two narratives,” Scott Redler, partner with T3Live.com, said in comments carried over the weekend by CNBC.

“I don’t know if it wants good news or bad news. At first, the hot economic news was bad because the Fed could go another 75 basis points and keep going, but now the market wants softer news. But is the landing going to be soft or hard? It’s like threading the needle right now.”

Charts Suggest Overshoot To Downside, Break Towards $85

In oil markets especially, the prospect of a recession has created more two-way price action in recent weeks, preventing any unsustainable surges in the price of crude even as China reopened from COVID shutdowns and an oil workers’ strike in Norway loomed.

“The price action overnight … hints more at panic and forced liquidation, than a structural change in the tight supply/demand situation globally,” said Jeffrey Halley, who oversees Asia-Pacific research for OANDA. “That says that in the physical market, supplies remained as constrained as ever, and despite the noise seen overnight, oil prices may be in danger of overshooting to the downside.”

This brings us to the earlier question: Will we get to $85 a barrel or lower before the end of July?

Interestingly, Citigroup does not fit a recession picture into the extreme price collapse it has forecast.

“For oil, the historical evidence suggests that oil demand goes negative only in the worst global recessions,” Citigroup analysts said in their July 5 projection.

“But oil prices fall in all recessions to roughly the marginal cost.”

Citigroup said its call was based “on an absence of any intervention by OPEC+ producers” and “a decline in oil investments”. Both sound quite ludicrous. The notion of a non-intervening OPEC+ is as believable as the notion of a vegetarian tiger. Also, a further decline in oil investments would only lead to the supply situation worsening—hardly the sort of thing that would support a price collapse.

In a more plausible scenario, investment manager BlackRock said commodity prices will likely remain "structurally higher" for decades to come as supply fails to keep pace with rising global demand.

Energy Aspects Director of Research, Amrita Sen also said crude oil prices will remain above historic levels despite the impact of a looming global slowdown. 

"Even in a pretty deep recession I just don't see oil prices going below $80, maybe even not even $90 because of years of underinvestment," Sen, one of oil’s biggest cheerleaders this year, said on Bloomberg TV.

But crude has fallen its most since April and after the March run to $130 a barrel by US benchmark West Texas Intermediate and the rally to almost $140 by global benchmark Brent.

Ahead of its US open on Wednesday, WTI was up $1.84, or 1.9%, to $101.34 per barrel in Asian trading by 01:30 PM in Singapore (01:30 AM New York). It settled Tuesday’s session—July’s first—down by 8.2% after finishing June lower by more than 7%. 

Brent was up $2.35, or 2.3%, to $105.12 in Singapore’s afternoon trade. Brent rose 1.7% in the previous session but lost nearly 6% in June. Prior to Tuesday’s collapse, it had held steadily near $120 for weeks.

The crux of the matter though is that WTI’s $97 low has been tested. The bears have tasted blood that they haven’t in three prior months and a further assault on the lower $90s is likely before the next attempt on the mid-$80s, according to charts drawn up for Investing.com by skcharting.com.

“The whole saga of a drop to $85 and even $79 will depend on how the market reacts to the next bear approach of $92,” said Sunil Kumar Dixit, chief technical strategist at skcharting.com.

“But the odds are in favor of a breakdown below $90 and it’s very likely that it could happen before the end of July.”

Oil Weekly
Oil Weekly

Source: skcharting.com with proprietary data from Investing.com

WTI’s weekly chart exhibits a second upcoming bearish wave aimed at the 50-week Exponential Moving Average of $92.40, which is possible with sustained pressure on Tuesday’s low of $97.47.

Stochastic indicators for WTI all show weakness, with the 12/23 reading for daily, 23/40 for weekly, and 55/66 for monthly all positioned for a bearish setup.

Any bounce back upwards is likely to be capped at the 100-Day Simple Moving Average of $107 and the 50-Day Exponential Moving Average of $109.

Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold positions in the commodities and securities he writes about.

 
Oil: Forget Year-End Forecast Of $65; Will We Get To $85 Soon?
 

Related Articles

Oil: Forget Year-End Forecast Of $65; Will We Get To $85 Soon?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (11)
Ron Raymond
Ron Raymond Jul 08, 2022 6:42AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Big players needed to drive out longs and take profits, still in backwardation with risk to upside. Liars in the game put out false narratives trying to take others monies. Notice prices didn’t change at the pumps much. Supply still tight, biden admin against fossil fuel production in US will make recession quite noticeable in the future. Shut downs duringpandemic wide spread with free money handouts wa worse thing for our future, allowing demand to outpace supply. The damage from powell pump not even close to be seen yet. Expect years of turmoil and dollar collaspe with eventual food shortage. Can’t get biden and other socialists out soon enough before greater damage is done.
Ron Raymond
Ron Raymond Jul 08, 2022 6:42AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Big players needed to drive out longs and take profits, still in backwardation with risk to upside. Liars in the game put out false narratives trying to take others monies. Notice prices didn’t change at the pumps much. Supply still tight, biden admin against fossil fuel production in US will make recession quite noticeable in the future. Shut downs duringpandemic wide spread with free money handouts wa worse thing for our future, allowing demand to outpace supply. The damage from powell pump not even close to be seen yet. Expect years of turmoil and dollar collaspe with eventual food shortage. Can’t get biden and other socialists out soon enough before greater damage is done.
Kelly Bright
Kelly Bright Jul 06, 2022 4:17PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Yes there's opportunity created and is IGT
Sure Suresure
Sure Suresure Jul 06, 2022 3:52PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Can you explain why earlier today Brent minus Crude was 4$, and now it is $2? The difference usually doesn't change that fast.
Barani Krishnan
Barani Krishnan Jul 06, 2022 3:52PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Like Jeffrey Halley of OANDA said: There's always the chance of the market overshooting to the downside. And that's what happened today.
Crypto Current
Crypto Current Jul 06, 2022 12:05PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Great article, Barani.
Barani Krishnan
Barani Krishnan Jul 06, 2022 12:05PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thanks, mate.
Barani Krishnan
Barani Krishnan Jul 06, 2022 9:42AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
So, we tested 97.67 low on. the day for WTI after the run-up to just above $102. Interesting.
Show previous replies (3)
SunilKumar Dixit
SunilKumarDixit Jul 06, 2022 9:42AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Barani sire, sustained break below Tuesday's low of 97.47 would be 50 Week EMA 92.40
Barani Krishnan
Barani Krishnan Jul 06, 2022 9:42AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
SunilKumar Dixit  Thanks Sunil. Yup, falling like a stone now as US session picks up.
Barani Krishnan
Barani Krishnan Jul 06, 2022 9:42AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
SunilKumar Dixit  Holy cow! $95 now :)
SunilKumar Dixit
SunilKumarDixit Jul 06, 2022 9:42AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Now 98-92 becomes a catchy area where speculators will juggle through. Strength above 98 points towards 102 & 104 while weakness below 92 calls for 86 & 79
Barani Krishnan
Barani Krishnan Jul 06, 2022 9:42AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
SunilKumar Dixit  Yes Sunil. There was a pullback before the close. Let's see what Thursday brings, together with EIA data.
Meir Cohen
Meir Cohen Jul 06, 2022 9:34AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
"The Rant of one time president" , biased much .
Barani Krishnan
Barani Krishnan Jul 06, 2022 9:34AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
It wasn't biased. It's factual -- he actually said those exact words though in a different context and I've just added it here for color. It's interesting that you'd be petty enough to narrow in on that, instead of discussing the merits of an article that tries to achieve with balance with all the highs and lows that's being projected for WTI.
Millennial Motivation Entrepreneur
Millennial Motivation Entrepreneur Jul 06, 2022 8:10AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Blackrock guy sounds like a perma bull lol. Decades? Get real, oil shoots up right before tecesiions the collapses every time. Nothing is going to change. Oil to sub 65 by the end of the year if nit sooner. Watch
Barani Krishnan
Barani Krishnan Jul 06, 2022 8:10AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Hah! I agree with you, mate. If there's one volatile space on earth, it is this! But between them and Citi's "non-intervening OPEC", I'd go with the former :)
Jaime Quadra
Jaime Quadra Jul 06, 2022 7:53AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
I'm more with BlackRock than with Citi, do they really think that demand can go that low (without another pandemic) in a world so heavily reliant on oil?
Barani Krishnan
Barani Krishnan Jul 06, 2022 7:53AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Possible, but tech has got to keep getting better for cars. Let's not even talk about EVs; the average automobile today has some 25% more fuel efficiency than those from the 90s. That itself tells you that it's possible to slow consumption from being a lot faster.
Mohd Izhar Muslim
Mohd Izhar Muslim Jul 06, 2022 7:47AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Thank you for sharing the article 💯
Barani Krishnan
Barani Krishnan Jul 06, 2022 7:47AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
You're most welcome, Mohd. Thanks for being a reader.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email