Oil May Fall More Than 30% After The Dreaded Death Crossing
Oil has saved the psychological support that marks the 90 dollars at the end of the week, but that has not prevented the dreaded crossroads of death from finally being confirmed.
Crude oil has been one of the raw materials that became more expensive with the post-Covid recovery and, above all, after the start of Russia’s invasion of Ukraine. Oil came close to even 140 dollars. After OPEC and Russia cut 100,000 barrels in crude oil production, the price of a barrel rose 4% before crossing the $90 barrier downwards with falls of close to 7%. Despite fulfilling the so-called crossover for two sessions, the 3.75% rebound yesterday sets the barrel above 91 dollars.
Cabrero explains that “this week we were very attentive to the evolution of oil, both in its reference West Texas and Brent, there was always the risk that a bearish graphic pattern that is known as ‘death cross’ would be confirmed. Well, finally that dreaded crossing of death has taken place after crossing the slower moving average above the faster moving average, specifically the 200 simple moving average with the 50 simple moving average, which is the most used combination to track the ‘ crosses of death'”, explains this expert in technical analysis.
This death cross can be interpreted as a bearish signal indicating that a change in the uptrend that defined West Texas and Brent is coming from the lows they marked in April 2020, after a full-blown crash. In fact, the last time we could see a ‘death cross’ in oil was just before the Covid crash, specifically at the end of January 2020 in the case of Brent and in mid-February of that same year in the reference West Texas. The crash that occurred later has already gone down in the annals of history, says Cabrero.
This crossroads of death raises the possibility of witnessing falls to the range of 62-67 dollars in the case of West Texas, explains Joan Cabrero, advisor to Ecotrader, the investment portal of elEconomista.es. The phenomenon had been brewing for weeks, but was completed at the end of this week despite the recovery seen on Friday.
In fact, the fear that this crossing of death would be confirmed could be one of the reasons for the certain panic that was seen in the markets, leading the price of oil to fall more than 7% in two days (last Wednesday the correction came to exceed 5%). Brent crude, a global reference, has gone from trading at 95.8 dollars to falling to the area of 88 dollars per barrel. Crude oil sinks despite constant threats from OPEC about further production cuts.
The expert believes that Brent oil does not find its first support until 80 dollars, which is the base of the channel that has been delimiting the downward lateral phase of recent months, being the next support and objective to value the area of 65.50 dollars , the range of which would mean a 61.80% Fibonacci correction of the entire big rally that took it from $16 to $139.
“In the case of West Texas, there is no support until 62-67 dollars and the analogous area to 65.50 for Brent would be at 53.50 dollars for West Texas. We are talking about falls of the order of 30-35%” Cabrero sentence. The price of crude oil is below the “average” forecasts of organizations such as the US Department of Energy, which forecasts an average price of 104 dollars for Brent in 2022.
Central banking and recession
On the day of last Thursday, pending the historic decision of the European Central Bank, crude oil was trading with a little more calm, trying to consolidate the 88.5 dollars per barrel. A more aggressive central bank than expected could have had a negative impact on crude oil prices.
Outside of technical analysis, oil is up against the policies of central banks, which are raising interest rates at a rapid pace in an attempt to cool demand and lower inflation. These restrictive monetary policies are detrimental to oil that depends directly on the consumption of households and businesses.
In addition, China, the only great power that is not implementing a restrictive monetary policy, is experiencing its particular crisis, starring continuous confinements due to covid and the collapse of the real estate sector. It is estimated that around 12% of China’s GDP is in ‘lockdown’.
From ING confirms these fears and adds in a morning note that “the most recent weakness in oil prices increases the risk that we will see some type of intervention from OPEC +. The group made it clear that more measures could be taken if they considered it necessary, and the market is probably moving towards levels where they start to feel a bit uncomfortable.”
In China, oil imports have recovered somewhat, but are still 9.4% lower compared to last year, while cumulative imports for the first 8 months of the year are down 4.7% compared to the same period last year previous.