For the first time in months, West Texas Intermediate (WTI) crude has fallen under $75 per barrel. Brent crude oil — the global benchmark — dumped under $80 for the first time since January 2022.
Despite the Russian oil price cap, the narrative in the markets has shifted. As I’ve noted for months, the global narrative would eventually shift from inflation to recession. Markets surged last week on the back of expectations that the Federal Reserve had helped bring inflation down due to rising interest rates.
But the mood shifted in the following days on lower global demand and recessionary fears. China’s on-again, off-again COVID-19 lockdowns and Bank of America’s projection that a recession would hit the U.S. economy by the first quarter didn’t help matters.
Crude oil prices remain under even more pressure looking forward. That’s why I want to explain what else has occurred in this market — and what you can anticipate in the weeks ahead…
Crude Realities in Global Oil
I broke down the Russian oil price cap on Friday. The G-7 rule aims to disrupt the flow of seaborn Russian oil. Western nations want to crush the profitability of Russian energy companies and starve their war efforts.
Ahead of the price cap’s implementation, many global oil traders simply dumped their positions. In conversations with traders in Europe, a lot of people took profits from their September buys and called it a year. With two big runs on oil prices in 2022, now is the time for traders to protect their bonuses.
Meanwhile, commodity trading advisers (CTAs), who manage commodity portfolios the way a money manager handles a mutual fund, have been sitting on the sidelines. As you can see, managers are sitting near 10-year lows with exposure to the market.
Russia is one reason… China is another… Significant concerns remain about China’s economic activity. Although the nation is reportedly reopening portions of the country, China’s service-sector activity slumped to a six-month low. Given China’s critical role in global demand, buyers stay on the sidelines.
This creates a unique proposition. If oil continues to peel lower, someone has to look at the price and bid. It’s just inevitable. And that creates more upside for would-be traders. That’s why I have a particular price target to start trading oil again…
When Do You Buy Oil Stocks or Crude?
It’s hard to catch a falling knife, especially when commodity prices face “recessionary” pressures. But I want to draw your attention to a simple target: Here’s where I can definitely buy oil if prices continue to erode…
Earlier this year, the Biden administration drained the Strategic Petroleum Reserve (SPR) as crude prices surged worldwide. The SPR is now at its lowest level in four decades, prompting concerns about the nation’s energy supply.
Even I was confused last month when the Biden administration said it aimed to replenish the SPR when oil prices fell to $70 per barrel. Now, this didn’t seem plausible a month ago. But now with recessionary concerns accelerating, it’s possible that we see crude prices fall to that level.
At $70, the U.S. government has created an artificial price floor for global crude prices. At the moment, CTAs have stood on the sideline. But I expect we’ll find a floor soon.
With momentum now negative in the markets, I’m staying on the sideline and waiting for crude to fall into oversold territory. And when it does, then it’ll be my time to pounce.
To your wealth,
Garrett
