Why Oil Prices Have Dropped

Over the past month, the price of West Texas Intermediate (WTI) has fallen from about $85.00 a barrel to below $75.00 a barrel. Concerns about weaker demand from China have negatively impacted oil prices for a while, and now fears of a U.S. recession have helped further drive prices down.

The most recent driver is the negative sentiment pervading the stock market, which has extended its reach into commodities. This heightened volatility has been driven by traders reacting to the fear of a potential U.S. recession, spurred by weaker-than-expected jobs data last Friday.

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

“U.S. crude (WTI) pulled back to a 6-month low on Monday as fear took over in markets, with the Japanese Nikkei experiencing the worst performance in 40 years,” notes Daniela Sabin Hathorn, senior market analyst at Capital.com. She adds, “As tends to happen when sentiment takes over, we saw some overreaction in the moves which led to a correction later in the session, supported by stronger ISM non-manufacturing data which helped to calm some of the nerves.”

The short-term bias for oil remains to the downside, with further weakness anticipated. The fear of a U.S. recession has dampened future demand expectations, fueling a 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.

On the technical front, WTI faces continued downside pressure. Hathorn highlights that “the price has firmly set below its key moving averages, which now provide some resistance on the topside if a reversal were to happen.”

Looking ahead, the lack of impactful economic events on the calendar suggests that sentiment will likely drive market momentum. Hathorn points out that “further commentary from central bankers could drive some of the momentum, especially if there is further talk about an out-of-cycle cut this week, even if it seems highly unlikely.”

One critical factor to watch in the coming weeks is the response from OPEC+. The group had planned to start increasing 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 the case that the recent drop in prices won’t allow the cartel to reintroduce higher production as it could drive prices even 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 summary, while the immediate outlook for oil remains bearish due to recession fears and softer U.S. economic data, the potential actions of OPEC+ and geopolitical risks could still play a crucial role in shaping the market dynamics in the near term.Follow Robert Rapier on Twitter, LinkedIn, or Facebook