Oil prices are continuing to post massive declines and have now reached their lowest levels in 8 months as investors begin to expect lower demand levels in light of the global economic slowdown. Traders are basing their positions on negative news headlines and macro economic data releases that are showing productivity declines in all of the major markets. Prices in the August Oil contract dropped to $78.60 per barrel on Thursday, as recent volatility began to slow. Volatility in the middle of this week was massive, as prices declined almost 4% after the Wednesday session. Oil has not been seen below the key psychological level of $80 per barrel since October of 2011.
Economic data out of Europe, China and the US continues to show weakness and this is leading analysts to suggest that demand levels will also remain weak, driving the price in Oil lower (from already-weak levels, based on moving average readings).
Weakness in Economic Data
Some of this week’s examples of this include the latest survey of exports from Chinese manufacturers, which came in below analyst expectations, at the same time similar reports out of Europe are showing the lowest levels in 3 years. This week’s data out of the US showed that the Philadelphia Federal Reserve is showing a 16.6% decline in the manufacturing index that reports for the region. Jobless Claims in the US were also released, with no significant evidence of improvement. The outcome of the latest Federal Reserve meeting is mostly in line with this (from a trading perspective) in that there was decisive action taken to make monetary policy more accommodative in order to stimulate economic productivity.
An important factor to consider, no matter which asset market is your focus as these events are widespread in their effects, and most asset classes continue to trade near their yearly lows as this information is released. But adding to the pressure in Oil prices is the abundance of supply that is being opened at US reserves, produced in an effort to reduce dependence on foreign sources. Most of these supplies are coming in at greater rates than analysts had expected and this is coinciding with the arguments that are currently being seen for reduced demand. These factors violate key Economics 101 scenarios, and the inevitable result is downside pressure in the price of Oil.
From a technical perspective, Oil prices are coming into some very critical support levels that are now seen at $75.40. Given the series of lower highs seen since the peak above $147, the longer term bias is clearly to the downside and a break of $75.40 will be confirmation of this. Indicator reading are also beginning to cross into negative territory so technical traders will be looking to sell any available rallies en route to a break of support and the posting of a new yearly low.