Crude oil prices continue to trend lower, with the WTI contract probing below $80 per barrel and hitting the lowest in eleven months, while Brent price being well below the $90 mark, at levels last traded in early January.

Both contracts fell below levels where the oil prices were at the beginning of the conflict in Ukraine, despite widespread expectations that the war would create much stronger turbulence in the oil market and push the price toward $200 per barrel.

Although both benchmarks spiked to multi-year highs (WTI hit $130.48 high and Brent rose to $138.22 per barrel) in immediate reaction at the early stage of the war, the initial panic response was short-lived.

The subsequent pullback and fresh rally’s stall were followed by a steady decline, which signaled that markets have digested all news and decisions surrounding the conflict, adjusting to the new reality and turning into a calmer mode, driven by supply and demand, rather than speculations.

Although fears that the war could further boost prices at this stage are significantly lower, the risk of sudden moves cannot be completely ruled out, as oil prices remain volatile and sensitive to a number of factors, which are the main price drivers.

Sanctions on Russia

The next phase was highlighted by strong supply concerns on tough sanctions on Russia (among which the key target was the energy sector), when oil prices rose again, though for a short period, despite Russia being among the world’s top three oil producers and strong reduction of supplies would significantly impact oil markets.

Russian supplies were not significantly hurt by sanctions, which aimed to cut Russia’s main source of income and eventually bring the economy to a collapse, this was not a scenario, as many countries found a loophole in the sanctions and continued to purchase Russian oil from different sources.

Russian oil was cheaper than the oil from other main OPEC producers, therefore more popular among buyers, with some western economies continuing to purchase from the second or third hand, Saudi Arabia increased purchases of Russian oil for its domestic needs and selling its own oil at a higher price, while China and India significantly increased imports of Russian oil, with a number of other countries which do not comply with western sanctions on Russia, continuing to buy oil from Russia.

This kept the overall situation balanced, preventing oil prices from stronger rises, despite the OPEC+ organization's refusal to significantly increase output (there was strong demand and pressure on the cartel from the United States to increase production and lower the prices ahead of the US midterm election), keeping the oil prices under control and without stronger oscillations.

China’s Covid restrictions

Currently, the situation in China is the key factor that drives oil prices, as fresh waves of new Covid cases in the country, prompted the authorities to impose restrictions.

China is following a zero-tolerance Covid policy and recent restrictions slowed economic activity in the third quarter, with new curbs to further slow growth in the world’s biggest oil importer and harm demand that would have a more negative impact on oil prices.

China is currently facing the most severe situation of the pandemic this year with a strong rise in new Covid cases in Beijing and nationally that prompted authorities in to start shutting businesses and schools in many districts and provinces and to tighten rules for entering the capital.

The latest wave of infections caused an immediate impact on oil prices, which collapsed near the lowest levels in 2022, with the situation souring the sentiment and darkening the outlook.

High inflation and recession

Soaring inflation in the western world, which hit a record high in the European Union and the highest in forty years in Great Britain, while price pressures slightly eased in the United States, but still being four times above the 2% target, prompted the major central banks to start raising interest rates to combat inflation.

The US Federal Reserve led the action and was the most hawkish, with the other major central banks following in monetary solid policy tightening, which should have resulted in restoring price stability, however, the task proved to be more difficult and lasting longer than anticipated.

Inflation in many economies continues to rise and becomes entrenched, which makes the job of the central banks in bringing surging inflation under control more difficult.

Also, higher interest rates harm economies by slowing economic growth, with a number of economies already being in recession, which may last for a couple of quarters.

Slower economic activity directly impacts demand for oil, adding to persisting concerns that global demand would weaken further and would keep oil prices under increased pressure.

Technical view

The overall picture remains bearishly aligned, based on fundamentals, with bearish technical studies on the daily and weekly chart, contributing to darkened short-term outlook.

Also, bearish signals are developing on the monthly chart, as the price action holds below significant Fibonacci support (38.2% retracement of post-pandemic $6.52/$130.48 rally) for the third consecutive month and 14-period momentum on a monthly chart is heading south and pressuring the borderline of negative territory.

All these factors contribute to the negative scenario, in which crude oil price is expected to remain under strong pressure in the coming months.

Only a significant change in fundamentals could change the picture, although such a scenario is quite unlikely, but cannot be ruled out.