There is a tense calm in the world markets with periodic drops because of the fear of political uncertainty in the United States. At the same time, oil is gradually losing its risk premium due to reports of the recovery of production potential in Saudi Arabia.
The recovery of production levels was a matter of honour for Saudi Aramco, which has been cherishing its IPO plans for more than a year. An unexpected attack on oil refining capacities became a real test of the market in “combat conditions”. This news has caused a sharp jump in oil and supported forecasts for further growth. But, in our opinion, it held more harm than good to oil.
Brent has returned to a downward trend, that prevailed during the last five months. And the spike in the middle of September turned out to be impressive but not a long episode in the overall downward trend.
China’s performance indicators over and over again reflect the burden of trade wars. Data released on Friday showed a drop in profits in China’s industry. The official PMI estimates on Monday morning marked the fifth month in a row of declining production activity. The combination of these data with the growing signs of recession in Germany and the collapse of business activity indices in the eurozone make us keep a cautious view on the prospects of oil.
In the U.S. consumers are refraining from spending. In August spendings grew by 0.1% in contrast to a 0.4% jump in revenues.
These are all signs of problems for oil in the coming months. It is worth recalling that the most aggressive drop in black gold prices in the last five years was launched in the final quarter of the year. This was in 2014, 2015, as well as in 2018.
It is also worth paying attention to the trend of ever-lower peaks. In 2008, oil started to turn from $140. In 2012 it was dumped from levels above $120. In 2014 it unsustained above $100. In 2018, these were levels at $80 per barrel of Brent.
Several technical factors increase negative expectations. Crude Oil failed to consolidate above the 200-day average. The break-down of this line or the inability to consolidate above in recent years was accompanied by increasing downward pressure. Now the oil is moving down within the downward channel with the upper limit to $61 and lower – at $51. In July and May, it took about a month to move from the upper to the lower bound. That is, by the end of October, Brent price may decline to $50 per barrel which corresponds to the lows of October last year.
So this time too, the oil may face a very turbulent end of the year with risks caused by both technical factors and long-running concerns about global oil demand.