Strength of the US Dollar will lead to crude stabilizing at lower levels
As per a report by Emkay Wealth Management titled ‘Navigator’,
Brent is currently trading at US$ 94/barrel after its attempted recovery to the US$ 104 level in a retest of the earlier highs. In its last update, the firm had mentioned US$106-107 as crucial resistance levels that it could retest in case of a surge in prices.
The fall in Brent crude prices is largely due to four important factors.
- Firstly, in pursuit of the zero COVID policy, China has shut down Chengdu city one of the biggest cities with a huge population of almost 21 million. Historically a lockdown in China has led to a softening effect on oil prices.
- The OPEC supply has been steadily rising. The supply per day has been 29.60 million barrels. This is said to be the highest supply since the pandemic, that is, since Mar-Apr 2020.
- The positive news about supply has been further strengthened by a sharp rise in US production which has now touched 11 million barrels per day. This is the highest production since early 2020.
- Lastly, there is a move by G7 countries to cap the price of oil from Russia. Russia has objected to this move though this move might cool down prices in the immediate term.
Over and above all these factors, there is an emerging fear of a likely recession pulling down the global economy in the coming months. Inflation has been on an up move consistently, contrary to the belief earlier that it is transient at best. To contain the runaway inflation, central banks in the US and Europe have launched an aggressive monetary policy in terms of rate hikes as well as reversing the easy liquidity that was introduced to aid growth during the pandemic years. The US and ECB are still not done with their rate tightening, and the street expects further tightening. The pace of the rate action may hurt economic growth in the near term, affecting demand for crude worldwide.
The rate action has also led to a strengthening of the US Dollar. A stronger dollar will gradually ensure that crude prices stabilize at lower levels.