The chess game continues | So Good News

Over the past 2 weeks, crude oil prices have fallen 12.8% and hit an 11-month low this week. So why did the price drop so much after a strong price increase in October?

China’s top management of oil demand

One of the factors influencing the main price of oil is, of course, China. It is the world’s largest economy and, along with the United States, the largest buyer of crude oil. China actually consumes 14% of the world’s oil – 5 times more than Germany and 8 times more than Great Britain. For this reason, news from China could shake the entire oil market.

In addition, China is also one of the largest exporters of raw materials. Therefore, an economic downturn in the Chinese economy or worse could have a severe impact on the global economy and supply chain. Another consequence is the drop in crude oil prices.

The number of COVID-19 cases in the region is currently a major concern. Such numbers have already led to a complete government shutdown. China has reported more than 55,000 daily cases of COVID-19 and its first death since September.

These developments have led most market participants to believe that the level of demand may decrease. In fact, there has been a decline due to the increased level of restrictions imposed by the Chinese government. However, if cities are completely shut down, demand will drop dramatically.

In addition to the above, crude oil prices have also been under pressure due to lower economic activity. For the first time this year, PMI indicators for the UK, EU and US fell into the contraction zone. The same can be said about declining GDP figures across all economies. Consumer demand for many reports, such as retail sales figures, remains high. However, if economic activity continues to decline, this could put further pressure on oil prices.

Nevertheless, traders should note that the decline may not be clear. Traders should be wary of conflicting factors. For example, a weakening US dollar is known to support crude oil prices. This is because it becomes cheaper for foreign buyers due to exchange rate fluctuations. Although such a situation could support prices, we did not witness it this time. Oil prices fell despite a nearly 6.5% drop in the US dollar index.

Another issue with crude oil prices is the potential oil price cap being placed on Russian oil. The European Union and G7 members are currently in the middle of these negotiations. As for the planned restrictions on Russian oil, of course Russia will not agree to this. In fact, the country has advised that it will stop all supplies. This is a problem as Russia is the second largest supplier of crude oil. However, the impact on the market will depend on how low the price cap will be.

Will OPEC intervene again?

OPEC did not hesitate to express its opinion on prices. On many occasions, the group has repeatedly stated that it is targeting a price of $80 per barrel. This is slightly higher than the current price. But the question traders are now asking is: “What will OPEC decide at its next meeting?”

OPEC will meet in the first week of December. If they announce a change in output like they did in October, it could cause high levels of volatility. As recently as October, the organization announced it would cut production targets by 1 million barrels per day, sparking a 6-week uptrend. This was in response to a price drop to $76.

In conclusion, we can understand that the price of crude oil is under pressure from certain elements, such as the contraction of the global economy, as well as the decrease in demand from China. However, it is important for traders to be cautious as other factors such as supply and OPEC can cause changes in the trend and volatility levels.