Bearish factors are starting to pile up. The market is not only on the weak side of the 50-day moving average at $104.20, but it’s also trading on the bearish side of the moving average at $100.01 to $103.93.
The downside momentum created by this bearish formation could send prices to $94.61 and $93.32. Taking out the latter means that prices are headed to the major support cluster at $89.49 to $88.62. A move into this area is likely to attract buyers since this is a value zone.
Diplomacy Takes the War Premium Out
Negotiations between Washington and Tehran have made progress and the market is pricing it. The Strait of Hormuz handles nearly one-fifth of the world’s petroleum trade. When it closed earlier this year, crude oil priced in a worst-case supply shock. Traders are no longer pricing that in. They are pricing in the possibility that those barrels come back.
A final agreement is not done. Disagreements remain. But the market does not wait for the handshake. It moves on expectations and right now the expectation is that shipping routes reopen and millions of barrels that were trapped start flowing again. That is why July WTI crude oil dropped below the 50-day moving average on a day when nothing physically changed in the Strait of Hormuz. The risk premium is leaving before the barrels arrive.
Strong Dollar Pressures Crude After Jobs Beat
The May employment report came in at 172,000 jobs against expectations of 80,000. The U.S. Dollar Index surged to its strongest level since early April. Money markets moved to 98% odds of a rate hike before year-end. The 10-Year U.S. Treasury yield climbed above 4.5%.
A stronger dollar makes crude oil more expensive for every buyer not holding dollars. That cuts into demand from Europe, Asia, and anywhere else refiners are bidding in euros, yen, or yuan. Crude oil was already under pressure from the diplomacy headlines. The payrolls number and the dollar move piled on top of it.
Supply Outlook Turns Against the Bulls
Governments drew down strategic petroleum reserves aggressively during the worst of the crisis. China pulled from existing stockpiles instead of competing for barrels on the open market. That took pressure off global supply chains at a time when every available cargo was getting bid.
Production outside the conflict zone held up better than the market expected. Analysts are now looking for global production growth to exceed consumption growth in the months ahead. That is the kind of outlook that keeps rallies from sticking. Even before the physical surplus shows up, traders start selling into strength because they see it coming.
Demand Risks Build in the Background
The energy shock pushed inflation higher across major economies and central banks responded by keeping rates elevated. Higher borrowing costs slow manufacturing, cut transportation demand, and squeeze consumer spending. All of that translates into lower fuel consumption.
U.S. stocks fell on Friday led by technology. The economic growth that supports crude oil demand is under pressure from the same yields and the same strong dollar that are pressing crude oil from the currency side. The demand story is not falling apart but it is not growing fast enough to absorb additional supply if the Strait of Hormuz reopens and Iranian barrels come back to market.
What to Watch
July WTI crude oil broke below the 50-day moving average at $91.90 on Friday. The diplomacy between Washington and Tehran is progressing. The U.S. Dollar Index is at its strongest level since April. The May payrolls number came in more than double expectations and rate hike odds jumped to 98%. Every one of those factors is bearish for crude oil and they all hit on the same day.
The risk premium that carried this market from the March lows to $97 is getting stripped out. Until the diplomacy breaks down or a new supply disruption emerges, the selling pressure stays.
