Rock Bottom In for Oil?

Geopolitics faces off with economic stagnation that could sap demand, leaving oil prices in limbo about whether the rock bottom is in or the slide will continue.

Light at the End of the Tunnel?

Crude prices staged a modest recovery yesterday after the US EIA reported a larger-than-expected drawdown from crude inventories. But there were some other indicators that prices might have hit a bottom. The slide since the peak of prices in the late summer has come with increased worries about demand. That was despite OPEC slashing production in an effort to prop up prices.

But now that it has become understood that the bias in the Fed has shifted away from more rate hikes, the dollar has weakened and opened the possibility that crude could see some gains. The expected three rate cuts next year make the case that lowering consumer credit costs might boost the economy and demand for crude.

Not the Final Word for the Bears

However, the oil and gas sector is still facing significant headwinds. Europe is in a better position regarding its winter fuel imports, but better-than-expected weather conditions have helped keep the price of natural gas down. The fears of a global economic slowdown have not gone away completely. OPEC was more bullish in its monthly report, citing recent economic trends as a sign that demand will be strong next year, and kept its assessment of demand growth intact. However, key OPEC leaders, such as Saudi Arabia, are still voluntarily curtailing production to keep the price up, although they continue to blame speculators (or "exaggerated concerns about economic growth") for the slide in lower prices.

Geopolitics is contributing to fluctuations in crude prices as Houthi rebels are increasingly targeting ships, including tankers, sailing through the Bab el Mandeb strait towards Suez. At COP28, nations reached a deal to transition away from fossil fuels, but this didn't phase oil majors, which have been on a merger spree that is consolidating the market and potentially unlocking economies of scale that could keep prices under pressure. However, plenty of unpredictable scenarios could cause fluctuations in crude oil over the coming months. China was forecast to have a milder winter this year, but recent snow storms have strained the nation's grid and raised demand for fossil fuels.

WTI Near Double Bottom

Light crude for February delivery may have rebounded off the June low at $68 per barrel, but the commodity will likely remain under pressure while trading below $80. Bears may have also not fully completed the impulse leg down from $92.50, with the door to $63.60 slightly open still. If prices depreciate to the range low, the probability of a double-bottom formation will increase the chances of a larger move to the top of the range. Any upside leg while bulls maintain the $70 round support may simply act as a pullback, implying even more substantial drops.

Source: SpreadEx / Light Crude Feb

Key Takeaways

Uncertainty in geopolitics and economic stagnation has left oil traders wondering about a rebound or a slide continuation. While a weakened dollar and potential rate cuts could support a potential gain in crude prices, the oil and gas sector continues to face challenges such as better-than-expected weather conditions keeping natural gas prices down and fears of a global economic slowdown. Geopolitical factors, including Houthi rebels targeting ships and nations transitioning away from fossil fuels, could also contribute to fluctuations in crude oil prices.