25.03.201913:22 Forex Analysis & Reviews: Oil worries for a recession

When supply balances between OPEC production cuts and growth in the United States, oil prices are determined by the dynamics of global demand. In this regard, the fall of Brent and WTI quotes against the background of the collapse of European business activity in the manufacturing sector to the lowest marks in the last 6 years and its American counterpart to the very bottom for 21 months looks logical. Purchasing managers' indices are leading indicators for GDP and its slowdown indicates a further slowdown in the global economy and global demand for black gold.

One of the main drivers of almost 30% of the Brent and WTI rally from the December lows was the de-escalation of the US-Chinese trade conflict. Trade negotiations evolved quite successfully. Donald Trump occasionally talked about progress but as they approached the finish line, investors began to doubt the end of the trade war. First, Beijing is unhappy with the preservation of $250 billion in tariffs on its exports to the States and the US president is not going to cancel them. Secondly, the arena of hostilities may shift from Asia to Europe. Both OPEC (the International Energy Agency) and the United States Energy Information Administration take these risks into account and lower oil demand forecasts.

Dynamics of oil demand forecasts

Adds a negative with the first 2007 drop in the yield curve in the red zone. The differential rates on the 10 and 3-year US Treasury bonds quite clearly predicted recessions in the past. With a time lag of 12-18 months, the American economy may face a recession, which negatively affects domestic demand for black gold and contributes to lower prices. Moreover, interest in safe-haven assets, including the US dollar, has returned in such conditions. Since oil is quoted in this currency, the growth of the USD index contributes to the fall of Brent and WTI quotes.

As for the proposal, the market continues to pull the rope between US companies and OPEC. The growth of oil production to 12 million b/s in the US leads to an increase in reserves and exports. On the other hand, the fall of rigs from Baker Hughes to minimum levels over the past 11 months indicates that another round of shale boom is coming to an end. On the opposite side of the rope is the cartel and other producing countries, including Russia. Saudi Arabia's activity is a serious bullish trump for Brent and WTI as it regularly exceeds production cutbacks. Nevertheless, the fact that Russia is satisfied with the current price level and does not want to roll over the contract creates a certain ceiling for black gold. When there is no agreement in the partners, buyers begin to record profits.

Technically, the rebound from the level of 50% of the CD wave pattern "Shark" was predicted for a long time. It occurred within the framework of the transformation of the model in 5-0. If the bears manage to lower the Brent quotes below the support levels by $64.1 and $58.7 per barrel, the risks of the downtrend recovery will increase.

Brent daily chart