Oil markets crash – again

In comparison with Tuesday’s frantic profit-taking, the financial markets were calmer on Wednesday. That was of course until OPEC unexpectedly announced it sees less demand for its own oil next year. The bears snapped up this news as soon as they could and instantly dragged the oil markets down to fresh five-year lows. The price of Crude plummeted to $60.41, while Brent plunged to $63.54., Demand for oil is falling at an alarming rate and there are serious concerns about an oversupply in the markets. Furthermore, repeated concerns over global economic health are resurfacing. This translates into intense pressure on the oil markets and I still don’t believe a price floor for either Crude, or Brent has been set in place.

Despite the oil markets tumbling to new record lows at least twice a week now, we continue to read about how the commodity will begin to make a comeback soon. This is going to be very difficult. For this, the economic conditions for the oil markets have to change, which is an unlikely possibility given OPEC’s decision not to cut production a fortnight ago. The only limited, short-term bounces are being encouraged by USD softness and suspicions that the People’s Bank of China (PBoC) will further ease monetary policy. The former is temporary and the latter would at best provide a short-term rise.

The only meaningful and long-lasting hopes for oil bulls to charge their way back up a very steep mountain rest upon a dovish Federal Reserve spooking investors by announcing a postponement of US interest rate increases for next year. I simply do not think this will happen because it would encourage so much profit-taking on the financial markets, that it would make the October global sell-off and even the bearish pressure we noticed on Tuesday look like nothing but a sales preview. Fears over the global economy are intense right now and the US economy is performing so strongly that it is leading the pack. It needs to raise rates and I predict that it will next year.

Oil is priced in US Dollars and there will be an aggressive USD rally as the timing for a Federal Reserve rate rise edges closer. This spells further disaster for the oil markets and makes it far more likely that oil will continue falling to new lows. Do I think the Federal Reserve is keeping a close eye on global economic fears? Yes. Do I also think they are keeping a close eye on a potential inflation decline? Yes. However, the latter is not yet being noticed and the Federal Reserve raising interest rates could help the former. The reason for this is that a stronger USD would actually weaken other currencies, and hopefully help them reinvigorate economic growth. The only thing I can currently see standing in the Federal Reserve’s way of raising interest rates is a repeat of last year’s horrendous winter weather conditions..

As you can see, the oil bulls’ best chances of making a comeback rests upon potential scenarios such as  widespread USD profit-taking, or potential easing moves from the PBoC. This is why I am not listening to the rumours of a potential comeback, but accepting the fact that Oil will continue to face pressure.

*Ahmad is chief market analyst at FXTM.

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