Commodities Hurt By Demand And Strengthening Dollar

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  • Crude oil facing uncertain future
  • Dr Copper examines head and shoulders

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Crude Oil Facing Uncertain Future

Crude oil prices – and investors in oil and oil-related stocks and other assets – are facing an uncertain future.

Specifically, it is not the supply but the outlook for demand that looks a lot more uncertain, owing almost entirely to the resilience of Covid and its impact on the global recovery.

As many countries have been forced to re-impose or maintain travel restrictions over the past few months due to the spread of the Delta variant of the virus, oil demand has been weaker than many had expected during the summer months.

Worryingly, the latest macro pointers from the world’s largest economies – the US and China – have disappointed over the past few days, suggesting the recovery may have already peaked. Retail sales from both nations missed expectations, while in the US we also saw a big drop in consumer sentiment, with the University of Michigan’s closely-watched survey falling to a 10-year low.

What’s more, US crude oil stocks have missed expectations on three out of the past four weeks, with the previous sharp inventory drawdowns coming to an end, just as we enter the twilight of the US driving season.

Demand for oil is thus likely to have been – and continue to be – weaker both because of seasonality factors and also due to reduced economic activity. This is why major oil forecasters, including the OPEC itself, have slashed their demand forecasts.

At the same time, investors are aware that the OPEC+ is slowly adding more barrels of oil to the market, reducing the risk of a supply shock.

Consequently, it is reasonable to expect weaker oil prices going forward. In fact, we have already seen some weakness in oil prices over the past few weeks, which means some of the above factors have already been priced in.

But we doubt that all the negative factors are fully priced in, and think prices had overshoot their fundamental values in the past anyway. Thus, the selling pressure is likely to continue for a while yet, and with the potential breakdown of key support levels, we may see increased technical selling activity too. As a result, oil prices could fall more abruptly going forward.

Dr Copper Examines Head And Shoulders

Like crude oil, copper has also been selling off recently on weaker demand concerns and stronger dollar. Demand concerns are reflected in part by the biggest copper consumer China announcing that its refined copper imports fell for the fourth straight month in July. Although supply bottlenecks should help to keep the downside limited, the bullish momentum has been lost. In fact, the pace of selling could accelerate if copper prices complete this head and shoulders formation by breaking the neckline and the 1.5-year-old bullish trend line around $4.15 to $4.20 area.

A clean break down below the above technically-important zone could trigger follow-up technical selling in the days and week ahead. If the Aussie dollar is anything to go by, then copper could very well break lower.

Article By Victor Argonvo, senior analyst at International Fintech, EXANTE