Why oil prices fell $10 in a month

Over the past month, the price of West Texas Intermediate (WTI) has fallen from around $85.00 per barrel to below $75.00 per barrel. Concerns about weaker demand from China weighed on oil prices for a while, and now fears of a US recession have helped push prices further lower.

The latest factor is negative sentiment permeating the stock market, which has extended its coverage to commodities. This heightened volatility was driven by traders reacting to fears of a potential US recession, boosted by weaker-than-expected jobs data last Friday.

As a result, oil, highly sensitive to economic cycles, has seen a significant decline in recent weeks. The current decline began with weaker US data, including a weaker-than-expected June reading released in early July.

“US crude oil (WTI) returned to a 6-month low on Monday as fear gripped the markets, with Japan’s Nikkei posting its worst performance in 40 years,” notes Daniela Sabin Hathorn, analyst market senior at Capital.com. She adds: “As tends to happen when sentiment takes over, we saw an overreaction in moves leading to a correction later in the session, supported by stronger non-manufacturing ISM data that helped to calm some nerves.”

The short-term bias for oil remains to the downside, with further weakness anticipated. Fears of a US recession dampened future demand expectations, fueling selling appetite among traders. While ongoing geopolitical risks in the Middle East provide a bullish driver for oil prices, demand concerns currently outweigh the possibility of supply disruptions.

Technically, WTI is facing continued downward pressure. Hathorn points out that “price has settled firmly below its key moving averages, which now provide some resistance on the upside should a reversal occur.”

Looking ahead, the lack of impactful economic events on the calendar suggests that sentiment is likely to drive market momentum. Hathorn points out that “further comments from central bankers could boost some of the momentum, especially if there is continued talk of an off-cycle rate cut this week, even if that looks highly unlikely.”

A critical factor to watch in the coming weeks is the OPEC+ response. The group had planned to start ramping up production in October, but indicated last week that this decision “could be paused or reversed depending on prevailing market conditions.”

Hathorn explains: “It may be that the recent drop in prices does not allow the cartel to reintroduce higher production as it could drive prices down further. If we were to see the decision to increase production pushed back to a later date, we could see a respite for oil prices.”

In short, while the immediate outlook for oil remains bleak due to recession fears and weaker US economic data, potential OPEC+ actions and geopolitical risks could still play a crucial role in shaping near-term market dynamics.

By Robert Rapier via rrapier.com

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