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Oil’s Collapse and Recovery

Out of more than 160 different tradable instruments on eXcentral’s platform, arguably the most interesting are Crude and Brent Oil. Both assets have experienced a price collapse of 81% early in the year and a price increase of over 335% thereafter. Both trends are within the same year and lasted more than 3 months each, plenty of time for traders to enter and exit the market prior to the end of the trend.

Oil has become one of the most traded and sought commodities in the world since the 1940s. The asset underpins modern society, mainly supplying energy to power industries, heat homes and provide fuel for vehicles and aeroplanes to carry goods and people all over the world. But how is Oil priced and what is driving today’s prices? Let’s look at the year so far:

Crash and boom 

The oil crisis of 2020 was mainly caused by the global lockdowns but also the price war between Russia and Saudi Arabia. The Crisis will be solved only by a pick-up in global oil demand which has definitely already started. The further away we get from restrictions and lockdowns, the more the economy is developing, as well as the possibility for a  vaccine. 

2020 is proving to be the most tumultuous year for the global oil industry since the first Gulf War. The evaporation of demand for goods and services in the wake of the coronavirus pandemic in conjunction with the inability of OPEC+ to adjust oil production early on in the crisis, has resulted in record price volatility for the commodity that fuels the global economy.

The price of Oil is linked to the economic conditions globally as the better the economic conditions the more demand there will be for Oil. Almost 70% of Oil is used on transportation such as car transport, marine transport and air transport. During the lockdown the previously mentioned demand dropped by almost 90% but as the economy gets back on track we can see the price recovering.

The Price Movement 

The price tilts sideways as it continues its attempt to recover to the price of $49 – $50 per barrel. The start of the global economies, the end of the price wars (Russia and Saudi Arabia) and the fact the price of oil was undervalued, supported the price and started the recovery in May this year. However, after such a collapse and with the vaccine still not found, traders are cautious about heavily buying into energy-based instruments such as Brent and Crude Oil. Hence why we are seeing a struggling upward trend.

The price throughout the last week formed both lower highs and higher lows further indicating the confusion in the market and lack of direction. If the price does break out of the symmetrical triangle, it may see increased momentum, especially if the breakout is above $45 or below $41.50.

This Week’s Fundamentals 

Oil quotes had an ambiguous dynamic on Tuesday, morning growth was replaced by a correction but the price movement continued in favour of the asset as the US market opened. Overall it was a positive day for the price of Oil.

The appreciation of assets is still facilitated by the weakening of the dollar, caused by the Fed’s revised approach towards inflation, as well as the growth of the Chinese economy which is one of the largest consumers of oil. Published today, data on the Caixin Manufacturing PMI from the PRC were positive. 

The indicator rose in August, exceeding forecasts, and amounted to 53.1 points. In the evening, investors are waiting for the weekly API report on the US Crude Oil reserves. The previous time they declined by 4.524 million barrels. The continuation of this trend may support prices.

In addition to the above the tropical hurricane temporarily reduced production in the Gulf of Mexico by 84% and suspended the export of liquefied natural gas. Overall, production fell by 1.5 million barrels per day, which is almost 14% of total US production. Nevertheless, the hurricane did not cause significant damage for the industry, and it is gradually recovering.

Overall, Oil is massively linked to fundamentals such as elements of supply and demand. However, it is also important for traders to take into account the price movement to ensure they are trading in the right direction. The price movement will confirm the market’s actions in terms of buying and selling.

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