China's Rigid COVID Policy Threatens to Weaken Crude Oil Demand

Today, the markets paint a clearer picture with less uncertainty within the economy. Investors have now had confirmation regarding the US employment sector and the state of inflation. While the US employment remains resilient, inflation remains high with no signs of being under significant pressure from the monetary policy.

The US Dollar Index (DXY) managed to breakout to a new monthly high over the past week, but then significantly declined. Only the Japanese Yen seems to be struggling to gain ground against the US Dollar. The DXY is currently hovering at 112.90, which is 0.37% lower than the daily open price. Over the past week, the price had found a strong resistance level above 113.50 and support below 112.50.

One of the main developing stories continues to be related to UK’s “selloff” crisis, which is more specifically related to UK GILTS. The British Pound and the FTSE100 have started the day on the front foot but the UK GILTS market will be without the Bank of England’s support for the first time since the purchasing program has ended. The GBP/USD is 0.50% higher and the FTSE100 rose 0.12%, but the government is hoping for stability in the bond market. The new UK Chancellor is due to speak later today and investors are hoping for more “U-turns” on the “disaster” economic package.

Crude Oil

The price of crude oil declined significantly on Friday in response to COVID-19 related comments made by the Chinese Premier, Mr Xi. This morning, the volatility levels remain low but the price is steadily increasing in value. The price of crude oil has increased by almost 1% this morning, taking the price again above $85. Currently, technical indicators are not providing a clear signal, mainly due to a lack of volatility. Crossovers are indicating bullish price movement, whereas the 55-day Moving Average and Parabolic SAR are signaling potential downward movement.

SNP500 15-minute chart on October 17th

Crude oil prices are being driven mainly by the weekend speeches made by Chinese officials related to China’s stance on COVID-19. In addition to this, the price is also likely to be influenced by a predicted response from the US directed at OPEC’s decision to cut oil production.

Last week, there was a rare protest by citizens against Mr Xi and his Zero COVID policy. However, the Premier has advised that there are no plans to end this policy nor alter it. China is seeing a rise in infections again which is very few by western standards, but these figures have previously triggered city lockdowns. Being the world’s largest purchaser of crude oil, such measures can have a significant impact on demand. The Chinese economy also continues to underperform according to local experts.

The price of crude oil is also likely to be driven by the expected change in monetary policy. The US is now expected to keep to their 75-basis point rate hike which will take the policy into the “restrictive zone”. The European Central Bank and the Bank of England are also expected to increase interest rates. As interest rates continue to increase and inflation remains high, the risk of a recession becomes more and more severe.

Economists, including Citibank, have advised the US will fall into a recession with a higher unemployment rate next year. The UK and Eurozone are likely to experience a recession earlier. The depth of the recession can potentially pressure the price of oil if demand continues to dwindle. This is also one of the reasons that OPEC decided to cut oil production targets earlier this month.

S&P 500

Investors have also turned their attention to the stock market and the last earning season for 2022. So far this morning, the price of S&P 500 has increased by 0.67% but still remains lower than the previous bullish wave from Friday. When looking at technical indicators, we can see a clear signal that the price is within a retracement and may soon decline again. However, caution is advised so traders ought to monitor the price and indicators for a change in the price scenario.

S&P500 1-hour chart on October 17th

Throughout the day, Bank of America is due to announce their earnings for the past quarter. The Earnings Per Share (EPS) is predicted to increase slightly from $0.73 to $0.79 but some economists have advised this may be difficult to achieve. Investors are also anticipating the quarterly reports from Johnson&Johnson’s and Netflix - both of which are scheduled for tomorrow. Both companies are expected to show a decline in EPS.

Much like crude oil, the stock market is likely to continue being pressured by the risk of recession over the next 2 quarters, as well as the higher interest rates put in place by Central Banks.

Summary:

• Crude oil prices come under pressure from China’s COVID-19 policy.
• US Federal Government plans to fight back against OPEC’s production cuts.
• Earning Season officially starts with Bank of America due to release their earnings today.
• US stock market is predicted to remain under pressure from higher Interest rates.
• GBP rises on promising actions by the new Chancellor.