In recent months we have been bearish of crude oil and have seen bounces as selling opportunities and expect the recent bounce to fade. Our view of the Fundamentals, sentiment, and technicals is below.
The Bull Market in Commodities Has Peaked
Commodities have been a big bull market as central banks have flooded the financial system with credit and traders have bet on the reflation trade – The view has been the market would make a strong recovery after COVID but this optimism is not supported by facts. Global PMI’s a leading indicator of economic growth going forward has started to turn down.
PMI’s and the Credit Impulse Warn That Global Growth Has Peaked
The huge amount of credit provided by central banks has peaked – on the chart below from Nordea they note when the global credit impulse fades, it tends to send commodities lower:
The second chart also from Nordea shows China’s PMI’s v credit impulse and we have turned lower.
If we look at unleaded gas a major by-product of crude oil demand remains low and we are just finishing the period which is normally the peak period for gasoline demand “the summer driving season”
Crude Oil Supply and Demand Outlook
Crude Oil and the USD
The USD has been soft recently and the DXY has corrected to major support which has helped to support crude prices – we expect it to firm up and if it does this is bearish for crude oil.
If we look at crude supply is ample and demand globally is weak. 70% + of volatility in crude oil is speculative (without speculators crude oil would hardly move) the reflation trade pushed crude oil too far to the upside and we are now seeing a correction as crude sells off to the downside. We have seen a rally recently and see the rally as a sell.
In terms of the daily chart below, if we rally above 70.00 we view crude as a sell back through the level with a stop behind 72.00. If we don’t rally, we view crude as a sell on a break fo nearby support with a stop behind 70.00 for a move down to 62.00 then 58.00.
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