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Chinese economy fears drop oil further

Monday saw oil prices decline sharply as concerns about the Chinese economy weighed heavily on traders and investors.

While equities continued their recent bear market rally, the FX and commodities markets provided a better insight into the overall sentiment of market operators. We saw the US dollar deliver its first two days of gains since the start of the month, while oil declined further.

Soaring domestic energy prices have been big news as part of the cost of living crisis in many western countries. However, the global oil price has been in decline since hitting a peak close to $130 back in March, as concerns over Russian energy supplies peaked. It should be noted that, despite the decline the price of oil these last few months, it is still almost 50 percent higher than levels seen in 2019.

In strong moves on Monday’s markets, a barrel of Brent crude fell by about five percent to below $94 (£78). This represents the joint lowest levels since the Russian invasion of Ukraine, as traders reacted to weaker economic figures from China.

The Chinese economy escaped a contraction in the June quarter as internal divisions, the lockdown of Shanghai, a further downturn in the property market, and weakening consumer spending all weighed heavily took their toll.

In an attempt to help the economy, the Chinese Central Bank unexpectedly lowered interest rates on key lending facilities for the second time this year, as companies and consumers remained wary of taking on new debt.

With China being one of the world biggest energy consumers, weaker growth in the economy would have an impact on demand for crude oil and other commodities. With that in mind, let’s take a look at the technical picture for oil.

US oil

1W oil futures chart (Source: OvalX)
Historical performance does not guarantee future profits.

The election of President Biden in November 2020 heralded an administration supposedly focused on new clean energy. While the rhetoric has been about the revolution in green energy, the price of oil futures has been a better indication of the true market reality. From a low of approximately $35 a barrel around the time of his election we have seen oil futures rise steadily until peaking in March 2022 at $130.50.

From a technical perspective, we can see the price formed a weekly double top reversal pattern, with the second leg peaking around $120 in June. Since then, we have seen the price of oil decline, which accelerated on Monday. We now see the price hovering around the 50 Period Moving Average (in red). Last time the price returned to the 50 PMA in November 2021 we saw price bounce from this area of dynamic support. Energy traders will be watching to see if this occurs again. We are also now beneath the significant Big Round Number (BRN) of $100 a barrel, which may to act as resistance to the topside.

1D light crude oil futures chart (Source: OvalX)
Historical performance does not guarantee future profits.

When we look at the technical picture in the daily chart, we can see that, as part of the price’s decline, the price has respected the Daily 20 Period Moving Average (Blue), having bounced off it twice. This is helping to create a scruffy descending triangle with the $90 level as the base. A significant break of this level would see the price continuing to $80 and even the $70 level of support last seen in December 2021.

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Please note that the presented content refers to the Oval group which contains two legal entities: Monecor (London) Limited authorised and regulated by the UK Financial Conduct Authority (FCA) with Financial Services register number 124721. Monecor (Europe) Limited authorised and licensed under the Cyprus Securities and Exchange Commission (‘CySEC’) with license number 096/08.