U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging lower on Thursday, after posting a steep sell-off the previous session. Demand concerns are pressuring crude oil prices this week amid increased bets for a global recession.
Expectations of aggressive interest rate hikes by the Federal Reserve are the catalysts fueling the recession chatter. U.S. Federal Reserve chief Jerome Powell also fanned the recessionary flames on Wednesday when he doubled down on the central bank’s fight against inflation.
At 07:15 GMT, August WTI crude oil is at $104.00, down $2.19 or -2.06% and August Brent crude oil is trading $109.53, down $2.11 or -1.89%. On Wednesday, the United States Oil Fund ETF (USO) settled at $80.91, down $3.14 or -3.74%.
Traders Trying to Find Balance amid High Inflation, Rising Rates, Recession Risk
The current sell-off isn’t signaling the end of the bull market. Tight supply and rising demand were the primary factors driving prices higher. Supply remains tight, but demand could fall if economic growth slows.
Since no one really knows the extent of the expected economic weakness yet, it’s difficult to forecast how much of a drop in demand to expect. Sellers are likely to probe the downside until they find strong buying interest.
Long-liquidation versus Short-Selling
We will also be looking for evidence of short-selling. The first leg down following a strong rally is usually long liquidation. The longs get out first, but short-sellers don’t just jump in and start pounding weakness.
If the market decides it’s time to short then just before the shorting begins, there is going to be a strong rally. No one wants to short weakness in this market, too risky.
New Catalyst for Traders
Wednesday’s price action suggests crude oil traders are latching on to the stock market for intraday help. You can see on the intraday charts that crude oil buyers came in when stocks started to climb.
This type of movement suggests traders have grown tired of the recession talk, China’s COVID shutdowns, Russian embargos, the Iran nuclear deal and Libyan outages. In other words, all of the news items hitting the headlines in recent weeks.
We don’t know how long it is going to last, but you may want to add the stock market to your list of intraday triggers. Wait for the set-up on the chart, use the stock market movement as the trigger.
API Reports Big Jump in Crude Inventories
The American Petroleum Institute (API) reported late Wednesday a build in crude oil inventories of 5.607 million barrels for the week-ending June 17. Analysts were looking for a draw of 1.433 million barrels.
It was the first build over 5 million barrels since mid-February, according to API data. Additionally, the build comes as the Department of Energy released 6.8 million barrels from the Strategic Petroleum Reserves in the week-ending June 17.
The API also reported a build in gasoline inventories of 1.216 million barrels for the week ending June 17, compared to the previous week’s 2.159-million-barrel draw. Distillate stocks saw an inventory draw of 1.656 million barrels for the week, compared to last week’s 234,000-barrel increase.
Like I wrote earlier, this chart pattern suggests long-liquidation is taking place rather than short-selling. I don’t think the major players are interested in shorting weakness.
Keep an eye on the next Commodity Futures Trading Commission (CFTC) Committment of Traders report for the data on the number of longs and shorts in the market.
Technically speaking, the market is testing a key support area at $108.58 to $104.66. Since the main trend is up, buyers could come in on a test of this area. However, a break under $104.66 could spill trouble.
Heads Up: The U.S. Energy Information Administration will release its weekly inventories report at 15:00 GMT.
For a look at all of today’s economic events, check out our economic calendar.
This article was originally posted on FX Empire