Oil breaks below the $80 psychological level

Despite oil reaching levels not seen since the early days of November last year, over the past week, WTI has broken below the $80 psychological figure following worrying financial releases stemming from China. In this report, we aim to shed light on the factors driving WTI’s price, assess its future outlook and conclude with a technical analysis.

China’s Industrial production spikes worries about future oil demand.

In last week’s oil report, we mentioned that should market worries about China’s recovery are intensified it may hurt oil prices, the above now seems to have materialized following the release of China’s Industrial production rates that were released on Tuesday. The Industrial production rates appeared to be indicative of a continued deterioration in Chinese economic activity, despite measures taken by the Government to stimulate growth. Given China’s status as the world’s largest oil importer, traders may be increasingly concerned that as China’s economic woes deepen it could potentially reduce oil demand, as the Chinese economy is primarily driven by manufacturing. Therefore, should China’s manufacturing industry continue to deteriorate, it could weigh on the commodities price and send oil to lower ground.

India and the UAE’s agreement.

On Monday the Indian Government announced that it would be settling bilateral trade with the United Arab Emirates in each other’s respective local currency. Following the announcement, Indian Oil Corp, one of India’s top oil refiners announced that it had made payments in Rupees for a purchase of a million oil barrels from the UAE, per Reuters. The development marks a potential shift away from the dollar, as local currencies can now be used which could remove the “middle man” being the greenback. However, it is an unlikely scenario that the UAE and India are going to try and eliminate the use of the dollar in its entirety but what may be interesting is the possibility of more nations following suit. Therefore, in conclusion, should more and more nations decide to settle oil trade in each other’s respective currency, it could in theory boost the price of oil in the long run, as demand may increase given the increased alternatives of purchasing methods which could be cheaper than using the dollar to settle transactions.

Russia increases its oil export duty.

Russia according to Bloomberg will be raising its export levy which is paid by oil producers by $21.40 per ton in September. The increased export duty is anticipated to generate increased revenue for Russia which has been seeing the price of Russian crude at high levels. The export levy would be placed on oil producers, therefore potentially being passed on to consumers as the costs of production increase, which in turn is reflected in higher oil prices. In conclusion, should the increased cost of production be transferred to consumers, we may see higher prices of oil, as higher prices may be needed to offset the proposed duty set by the Russian Government.

Iran announces 67 new oil and gas projects.

According to a news report, Iran has announced 67 new oil and gas projects which are worth around $15 billion, with Iran aiming to increase production of 3.3 million bpd by the end of August, which is a 0.12 million bpd increase from the current 3.18 million bpd that the country is currently producing and to reach 3.5 million bpd by the end of September according to the head of the National Iranian Oil company. Overall, the potential $15 billion investment by Iran could increase the nation’s oil production capabilities in the long run, yet by increasing production it could ultimately drive the price of oil to lower ground, as there would be a greater supply of oil in the market in the long run, as an increase if the supply would reduce the scarcity of oil, thus potentially making it cheaper on a global level.

Technical Analysis

WTI Cash 4H Chart

• Support: 78.80 (S1), 77.00 (S2), 74.00 (S3)
• Resistance: 80.00 (R1), 81.75 (R2), 84.10 (R3)

WTI’s price moved lower over the past week, breaking below the $80 psychological level. We tend to maintain a bearish outlook for the commodity’s price as the downwards-moving trendline incepted on the 10^th of August, combined with the RSI indicator below our 4-Hour chart which currently registers a figure near 30, implying a rather bearish sentiment on behalf of the market. For our bearish outlook to continue we would like to see a clear break below the 78.80 (S1) if not also the 77.00 (S2) support levels with the next possible target for the bears being the 74.00 (S3) support base. On the other hand, for a bullish outlook, we would like to see a clear break above the 80.00 (R1) if not also the 81.75 (R2) resistance levels, with the next possible target for the bulls being the 84.10 (R3) resistance ceiling.         

Disclaimer:
This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.

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