This article was written exclusively for Investing.com
While there is talk of crude oil reaching $100 per barrel (and some even calling for $200) amid concerns over a supply shock, I reckon the greater risk is that prices will head lower from here.
Hurricane-hit production declines in the US have been almost fully restored and oil stockpiles ended a run of 7-week drawdown with a sizeable 4.6 million barrel rise last week. Meanwhile, the OPEC+ is meeting on Monday to address some of the supply risks. The group will most likely try to ease pressure on oil consumer nations such as India and China.
One option that the OPEC+ might opt for would be to double the expected November production level increase—that is 800K bpd—and then, depending on the situation in the next couple of months, leave things unchanged in December. The group had already decided to increase output by 400K bpd for October at its previous gathering.
While refusal to do anything might provide oil prices a further shot in the arm in the short-term, this will only come back to haunt OPEC in the longer term outlook, as rising oil prices and in turn even more inflation could, for example, trigger fresh currency crises in some emerging market economies, crippling demand for everything, including oil.
Speaking of demand, I reckon the ongoing supply bottlenecks, high energy prices and inflation are already causing a slowdown in the global economy. We have already seen Chinese data come in on the softer side in recent months, but there is a risk that other, more advanced economies, might start feeling the pinch too.
Meanwhile emerging markets are facing both higher inflation and even more weakening purchasing power due to their currencies being hit. Demand from countries like India and Pakistan could slow in the months ahead.
There is an even more pressing issue to consider. Investor sentiment towards risk has taken a U-turn amid rising dollar and bond yields. There is a big risk that if the stock market remains under pressure, we might see investors shun all risk assets—including crude oil.
Brent oil has shown some tentative bearish signs after failing to take out the key $80 hurdle on a few occasions. For example, it formed a bearish engulfing candle on Tuesday, and the high of that day’s range has not been re-tested since. This suggests that perhaps the sellers have started to get the upper hand. However, what’s missing is some downside follow-through to scare away the bulls en masse.
Indeed, support in the $77.90 to $78.50 area has so far held on a daily closing basis. This area was previously resistance, as shown by the shading on the chart. A daily close below this area is therefore needed to tip the balance decisively in the bears’ favour after this week’s stalemate price action so far. If this happens, the path of least resistance will then be to the downside. As such I would expect near-term support levels such as $76 to provide only a temporary bounce.