Forex Analysis & Reviews: Oil market outlook for Q4 2022
time 02.10.2022 03:16 PM
time Relevance up to, 28.10.2022 05:47 PM

Dear colleagues,

When the price of American WTI oil, available to InstaForex traders under the #CL ticker, was trading at about $80 per barrel on Friday, we should determine the scenarios for its movement for the next few months in order to have an action plan for all occasions.

As the legendary General Dwight Esenhower, who later became president of the United States, said: "In preparing for battle, I have always found that plans are useless, but planning is necessary." Therefore, in this article we will consider bullish and bearish factors that can lead to changes in the price of oil, and consider an algorithm of actions for a particular case.

Among the factors of decline known to me at the moment, the most significant is the possible global recession in the world economy, which will reduce oil consumption around the world. Some economists believe that we are in for a crisis more severe than in the thirties of the last century, which broke out in the United States and then spread to Europe. Others suggest that a hard landing can be avoided, and the global, read American, economy will quickly neutralize the negative phenomena - and everything will be fine.

This position, for example, is taken by Federal Reserve Chairman Jerome Powell and the Open Market Committee, which he heads, when they speak of their readiness to raise the rate at least once more by 0.75% this year. As usual, the reality will be significantly different from what we assume as a scenario, but this is no reason to give up trying to look into the future.

A decline in the price of oil is a completely natural and expected process in the event of a slowdown in the global economy, the center of which is currently the United States. Moreover, the release of data on GDP indicates that the US economy is already in a recession.

However, such a scenario looks quite logical if we consider it in the dollar-centric system of the world economy, which is now fragmenting before our eyes. In other words, if this situation had developed ten years ago, then oil would have had no other alternative. Fortunately, now the situation is different and oil has options for growth even amid a recession in the United States. Moreover, it seems to me that there are even more of these options now than there are reduction options.

The first growth factor is the OPEC+ agreement. The cartel and the countries that have joined the agreement as early as next week, October 5, may cut production and thereby break the negative prevailing on the market now. It is said that Russia, as one of the pillars of the agreement, insists on the reduction of 1 million barrels. If such a decision is made, it can reverse prices almost instantly. Therefore, decisions on the sale of oil must be made with extreme caution.

The second growth factor is the depletion of strategic reserves in the United States, which are beginning to replenish them ahead of schedule. Even if the replenishment is gradual, another million barrels per day is leaving the market, which in the current conditions in itself can lead to a shortage.

The third factor favorable for the price of oil is the embargo on the supply of Russian oil by the EU countries, as well as the introduction of a price ceiling on it. The European Union currently imports about 1.5 million barrels per day from Russia. After the introduction of a ban on supplies, European countries will have to look somewhere for one and a half million barrels, which are not currently on the market. As a result, with a high probability they will buy oil from Russia, but they will do it through numerous pipelines. In turn, Russia said it would refuse supplies to countries that would apply price restrictions.

The fourth factor is that the explosion of the Nord Stream gas pipelines, in addition to general geopolitical tensions, will lead to a shortage of gas in Europe, which means that heating oil and coal will have to be used to generate electricity, which will further increase oil consumption.

Adding to the basket of bullish factors is the improbability of a nuclear deal with Iran in the near future, which means that Iranian oil will continue to enter the market through gray schemes. There are also reports that the US is imposing sanctions on a number of Indian and Chinese companies involved in the sale of Iranian oil to world markets.

To top it all off, the seasonal rise in oil comes in the first quarter and the hurricane season in the Gulf of Mexico is not over yet, but all my thoughts are not worth a damn if they are not confirmed by the chart, but here it is not yet as rosy as I would like to see (fig.1). At least I can't say yet that oil is ready for growth or even started to form a reversal.

This image is no longer relevant

Figure 1: Technical picture of WTI #CL oil

The technical picture of WTI oil indicates that the quote has been declining since June of this year and remains in a downward trend. This is clearly seen on the chart, where the price makes decreasing highs and lows, while being below the levels of the 50-day and 200-day moving averages, which can be taken as quarterly and annual averages. Based on the postulate of technical analysis, the movement will continue until we get the opposite, we should assume a further decline in quotes, the target of which is the level of $70 per barrel. In turn, it will be possible to ascertain the growth of the quote only when the price exceeds the level of $90.19, which is now the nearest local high.

There is another danger that novice traders often underestimate, and that is the urgency of oil futures contracts. The fact is that oil contracts are closed every month, and the transition to the next contract may not be as easy as it seems. In any case, a rollover can be associated with a loss of funds. Therefore, buying oil and not waiting for its growth can become a problem for a trader who will be forced to close positions at a loss and earlier than he would like. Making rash buying decisions is all the more dangerous given that the daily chart shows price direction in a range of one to three months.

We will find out in the near future how events will develop. No one has a crystal ball, and no one knows the future, so be careful, be cautious, and follow the rules of money management.

Daniel Adler,
Analytical expert of InstaForex
© 2007-2022
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