What's Going On in the Oil Market?

Over the past week, the oil market has been under pressure from various fundamental factors, ranging from forecasts of lower oil demand to news from Poland and China. Traders have to analyze many factors and indicators on a daily basis to make an unbiased forecast about the price of Brent and WTI.

We have compiled all the relevant data into one basket to finally understand where the oil market is headed.

Market drivers

The only positive factor for oil over the past week was the cooling of U.S. inflation. This put the markets in motion and sparked talk of an impending rise in demand for crude oil. However, subsequent events have changed the situation, and now the price of oil is moving in the opposite direction.

The geopolitical tension, the spread of COVID-19 in China as well as changes in the OPEC+ policy remain the main market drivers.

In particular, earlier, OPEC lowered its global oil demand growth forecast for 2022 by 100,000 barrels a day to 2.5 million barrels a day.

That’s “in large part due to China’s anti-COVID measures — a move which markets will likely interpret as a pretext for further demand cuts by the group,” said Harry Altham, energy analyst, EMEA & Asia for StoneX Group.

Another factor in the decline was the news of a possible escalation of the military conflict in Ukraine on November 15, when the capital Kyiv was attacked by missiles. On the same day, one of the missiles hit the territory of Poland. This caused concern among market participants.

The net-result has been a sharp rise in crude oil volatility. With the focus on geopolitical issues that could further constrain supply, however, this rise in oil volatility hasn’t helped support a rebound in crude oil prices.

As a result, the price of oil remains within the weekly range with a declining vector:

• Brent Oil Futures trades at $90.20 as of Friday morning
• WTI Oil Futures trades at $82.30 as of Friday morning

Oil price correlation still weak

Most factors indicate that the price of oil continues to be under pressure. And in the coming weeks, many analysts see no prospect of a renewed rally in the commodity market. This is indicated by China's policy on COVID-19, the resumption of the Druzhba pipeline, as well as the lack of critical consequences of the struck oil tanker and the Omani coast.

The recent oil price jumps were due solely to situational factors, which do not determine the real level of demand for oil in the context of the risks of recession and total quarantine in one of the largest countries in the world.

The International Energy Agency (IEA) also forecasts demand growth to slow to 1.6 million bpd in 2023 from 2.1 million bpd this year. This is another determining factor for the commodity market.

Therefore, many market participants do not expect to see the cost of Brent and WTI oil over $100 this year.

Perhaps stronger market factors will emerge later, indicating a resumption of a bullish rally.

These could be:

• End of the Fed's hawkish policy.
• Completion of quarantine in China.
• De-escalation of the conflict in Ukraine.
• A complete ban on the purchase and sale of Russian oil, will cause increased demand.

So far, however, these factors have not been fulfilled. Therefore, other fundamental reasons remain the market drivers.