Is the Crude Oil Pullback Enough?

Commodity

Summary:

Oil prices have continued their pullback for many days, and many people will ask whether the pullback is sufficient. Is it a pullback or a reversal? Perhaps the rising logic of oil prices has changed.

Friends who follow us will know that since the beginning of August, when US crude oil fluctuated around the previous high of 83, we have been emphasizing that oil prices will peak in the short term. At the same time, we also recommended in our daily trading analysis to go short at lows and keep trading with small stop losses to make large profits. The reasons given are: for one thing, the surge of oil prices is too fast, and the market's fear of being high and its risk aversion are gradually strengthening under the signs of being overbought. As a serious negative divergence has appeared technically, the rise in oil prices has largely been limited, which will need a decent large correction to dispel bullish fears. For another, the peak demand season in both the US and China is about to pass with the end of the summer, which means that demand will peak in the short term. Finally, China's economy was a factor supporting oil prices in the previous period while its recent weak data and weak reality seem to be unable to support oil prices anymore, especially the decline in China's crude oil imports in July.

At this point, some people may ask, what will happen to oil prices next? To answer this question, it is necessary to understand the rise logic of crude oil previously and the correction logic this time. First, let's look at the logic of the rise: on the one hand, crude oil has returned to commodity fundamentals driven by supply factors. Saudi Arabia's voluntary 1 million b/d cut was extended for another month until the end of September, and Russia also cut output by 0.3 million b/d. Coupled with the accelerated reduction in inventories, market expectations of tighter supply have further intensified. On the other hand, the promotion of demand factors also plays an important role. Travel demand in the US peaked in July and August, which is also a period of high summer demand in China. Investors expect that the economic growth of China will drive global demand for crude oil.

What is the logic of this correction? Of course, as we said before, a technical pullback is necessary, as well as constraints on the dollar rally. However, we can also see changes in several areas. First, crude oil demand fell in autumn. Crucially, China's economic data is weakening across the board, rather than the gradual strengthening that the market expects. Second, the dollar did not weaken as investors expected but rebounded strongly driven by US Treasury yields, with the dollar reaching 103 again, close to 104. Finally, inventories are gradually stabilizing rather than drastically decreasing, and there are even signs of accumulation.

What are we going to face? First of all, as the US Treasury yield remains high, the economy as a whole may run in a combination of high inflation, high-interest rates, and low growth for a long time. The probability of new risks will increase, which is not good news for oil prices. Second, what we have to face is the decline in demand after the end of peak season, as well as the weak reality of the global economy.

What about future oil prices? Although there has been a large correction, it may still have to continue, but the process will be repeated. As the technical upward trend has been broken, traders should beware of a pullback turning into a reversal. Oil prices will still likely continue to decline!

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Is the Crude Oil Pullback Enough?

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