Oil is an indicator of the health of the global economy. And if it is shaken, prices will surely fall. In this regard, the peak of Brent to the area of 9-month lows should not surprise anyone. Aggressive monetary restriction is massive, which increases the risks of a global recession. In such conditions, the demand for black gold is declining, which pushes futures quotes down.
In 2022, for every central bank that cuts rates, there are 25 that raise them. +75 bps became the new norm instead of the traditional +25 bps. Regulators around the world have adopted the Fed's mantra of sacrificing their own economy to break the back of inflation. As a result, borrowing costs are mushrooming, consumer demand and GDP are slowing, and a global recession is getting closer every day.
The World Bank has lowered its forecast for global economic growth from 4.5% to 3% in 2022 and from 3.2% to 2.2% in 2023. It believes that if gas prices in Europe jump by another 50%, the eurozone will face a prolonged recession next year, and its GDP will shrink by 1.3%.
The specter of a looming recession is not the only driver behind Brent and WTI. An aggressive hike in the federal funds rate and a collapse in US stocks pushed the trade-weighted dollar to an all-time high. Since oil is quoted in US currency, the increase in the USD index is a bearish driver for the main grades of black gold.
Dynamics of oil and US dollar
The picture really looks extremely pessimistic for the Brent bulls, but they are trying to find a reason to rejoice in the sea of negativity. The market is talking about the entry into force of the embargo on Russian oil from December, the fact that OPEC's silence about the collapse in oil prices is reminiscent of the calm before the storm, and the recovery of Chinese demand. Alas, for each trump card of buyers, sellers have their own arguments.
According to information from Indian oil companies, discounts on Urals oil from Russia have significantly decreased from $36 per barrel at the beginning of the armed conflict in Ukraine to "teenage" $12–14. This suggests that Moscow has managed to find new buyers, and problems with global supply will in fact turn out to be less than originally thought.
According to Trafigura, the world's largest oil trader, despite the short-term weakness, the medium- and long-term prospects for black gold can become "bullish" at any moment. China's victory over COVID-19 is fraught with a surge in demand, and the lack of investment in production suggests that this demand will be difficult to meet.
Technically, on the weekly chart of Brent, there are Splash and Reversal patterns with acceleration and Gartley. The breakthrough of the trend line of the Introductory stage by quotes is a wake-up call for the bulls. At the same time, when the levels of $81.5 and $74.0 per barrel are reached, the risks of a reversal will increase. In my opinion, oil should be bought on the rebound from these levels or on the breakout of the resistance at $87.6.