Time is working against the plummeting energy prices that increasingly depend on pushing stocks to survive, in our view. Optimism about continued OPEC production cuts and reduced demand is likely to perpetuate market realism. One of the most important risks of lower energy prices is an extension in the stock market.
As long as the stock market remains indifferent, Crude Oil will be stable. After bouncing from one-hour lows, the bearish trajectory is in danger of restarting since the decline in Crude Oil. At just 0.80, the 24-month correlation between the Bloomberg Energy Spot and the S&P 500 is by far the highest, indicating what really matters for most of the commodities: stocks. We see details of OPEC production cuts and optimistic demand estimates in the form of market noise amid typical shifts, which is unfavorable to prices.
OPEC needs to keep the cut to balance the market, and revenue requirements are greater to maintain an adequate supply. Against the backdrop of fast-moving technology and demographic shifts, revisions to demand estimation tend to risk an acceleration of the decline.
Fast-moving technology has a history of pressure on commodity prices, and a bear market for crude oil is associated with this phenomenon, in our view. The fall in the price of the world’s most important commodity has led the G4 central bank’s balance sheet steadily as a percentage of GDP since the financial crisis. If resource-heavy inflation is a problem, central banks will be less willing to provide more quantitative easing (QE). Low crude oil prices are the prevailing trend and we believe that Brent crude is likely to continue down this path, especially as epidemics affect global economic growth.
Supply cutting is the result of lower prices, but production needs to be stronger as prices improve and technology advances. Our chart gave Brent crude a jump in good resistance to the downside.
For example, in relation to deflationary forces in commodities of more than a decade, we see limited upside to the natural gas price boom. Global warming reduces the need for gas for heating and the associated demand for electricity increases as landscapes change with rapid technological development. The rapid increase in US supplies has been the primary constraint to the gas price, and we see a major force keeping production trajectory moving upward. Our chart depicts the record future recovery of natural gas from its multi-decade lows in June, and the EIA predicts a sharp drop in supply.
If past trends are repeated, gas will continue to do the same for most of the past decade – a downturn from US supply growth. Good resistance is around $ 3 per MMBtu, versus the Aug 26 price of about $ 2.50.
If stocks continue to swing, crude oil will remain stable, but lower energy prices are the dominant trend, in our view. At around $ 46 a barrel on August 26, Brent crude is considered somewhat reasonable for an optimistic recovery in global demand and continued OPEC cuts. There is an increased risk of a dose of realism – slow demand and oversupply, particularly from North America – that has driven prices down since the 2008 peak. The West Texas Intermediate reverts back to the old quality premium versus Brent, so both criteria must ultimately be determined by good resistance About 0.50.
Until the stock market can move forward, we resume the most enduring bear market path and head towards $ 30, given the greater risks for crude oil.
The familiar example of 2019 to recover crude oil in the stock market until it is no longer possible is, in our view, a high-risk repetition. Akin in 2018-2019, when crude oil and equity plunged and were simultaneously recovered, the West Texas Intermediate price recovery exhibited similar symptoms of fatigue when it peaked at around $ 66 a barrel in the second quarter of 2019. Our chart shows a significant difference from a period Last year – US WTI stock is very high, indicating expensive headwinds.
With 30-day WTI volatility dropping to the lowest time since January, just before the price drop, our radar has been raised for some volatility which means a bounce. Crude Oil is in danger of peaking soon and the stock market rally may not recover. The lack of exposure in West Texas regarding Hurricane Laura is a sign of relative weakness.