FxPro Review: Oil Prices Are Retreating, But a Crash Like in 2020, 2014, or 2008 is Unlikely
Over the past four weeks, oil prices have been under pressure, but since the beginning of this month, West Texas Intermediate (WTI) and Brent Crude have found support at $77 and $82 per barrel, respectively. Since the second half of February, prices have been consolidating in the same range for over a month. However, to challenge the 200-day average level, the current situation is likely a pause before potentially further declines.
FxPro's senior analyst Alex Kuptsikevich notes: Two weeks ago, bulls showed strength, causing a 4.5% drop in two days and pushing prices immediately below the 50-day and 200-day moving averages, which are mid-term and long-term trend filters, respectively. From this perspective, the consolidation last week and early this week could be eliminating excessive short-term overselling, providing strength and liquidity for new challenges.
Moreover, the latest consolidation area aligns broadly with the upward trend support that has been effective over the past five months. A new downward trend would be a precursor to breaking this upward trend, with potential downside targets for WTI at $75 and about $79 for Brent Crude. Near this level is the 200-week moving average, and a break below this average could intensify discussions around cutbacks, leading to an upward price reversal. Over a year, impulsive declines have not exceeded 3%.
The stance of the US government has also changed in the past two years. Like at the end of last year and the beginning of this year, we saw the government opting to purchase stocks to supplement foreign exchange reserves during economic downturns,
Of course, the support from OPEC and the purchase of US reserves cannot provide unlimited backing. If we look at past instances, markets easily broke through this level in 2020, 2014, and 2008, and briefly surpassed it in 2018. Therefore, WTI crude falling below $72.5 and Brent Crude below $76.3 could mean that sellers are gaining the upper hand. If this leads to the kind of free fall seen in 2020, 2014, or 2008, prices could likely drop back into the $30 range. At this price, most production would become unprofitable. However, this is only due to a clear dysfunction in the financial markets. So far, there are no signs of this, although the situation could change at any time.
Nevertheless, we believe that oil is poised for growth recovery, as OPEC+ can easily cut 0.5% of global production from the market, enough to reverse the trend. Furthermore, we should not overlook the recent rise in commodity prices as China has intensified measures to stimulate economic growth.
