Why is Oil's Rally in Danger?

Why is Oil's Rally in Danger?

2022-06-24 • Updated

Yes, oil prices are burning right now, and, as a result, inflation is getting hotter worldwide. However, oil's bullish momentum is under threat. Below we've listed the factors that may cool the demand for the commodity.

1. Lockdowns in China

The drop in oil prices has accelerated since April 25 after Beijing closed some public places and stepped up mass testing to avoid a complete lockdown like the one in the global business hub Shanghai since the beginning of the month. The latest shutdowns have disrupted factories and supply chains, raising concerns about the economic growth in China, the world's second-largest economy, after the worst outbreak in two years. This will lead to a slowdown in oil demand since China is the largest importer of oil in the world. The lockdowns will likely reduce China's oil demand by 1.1 million barrels per day in April. 

2. Supply is still here

Any projected oil deficit in the third quarter will be small and can be filled by increased OPEC production as oil demand growth continues to decline and global economic growth weakens. Moreover, the market is not entirely in deficit and could even post a small surplus in April. Balancing demand and supply will be more difficult in the third quarter and beyond, as the decline in China's demand is expected to be temporary. In contrast, the drop in Russian oil production will continue for longer.

3. Lower intraday trading ranges

While volatility in the energy markets remains high, there are signs that it's declining, with intraday trading ranges also pointing lower. Brent crude appears to be in the latter stages of its third wave since Russia's invasion of Ukraine. The amplitude of the trading waves is declining. The first wave range was $43 per barrel, the second was $23/bbl, and the third was $14/bbl.

4. Inflation will calm energy prices

With inflation continuing to stifle global economic growth, markets are worried about a possible recession resulting from higher energy prices and the Russia-Ukraine war. The war and rising inflation will destroy the demand for oil. As consumer spending declines and production and demand slow, energy prices will fall. The IMF cut its forecast for global economic growth by nearly a full percentage point.

It's necessary to remember the factors listed above and monitor the situation. In general, however, the bulls still have the upper hand over oil and natural gas, despite all these mixed signals that may threaten the bullish momentum but not stop it.

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