Volatility returns to Oil

The Oil markets saw some fairly large price swings over the last few days, culminating in a drop of over $3 a barrel for WTI Crude Oil. There are a number of factors involved and the inventory data tomorrow could add further volatility.

Europe stands ready to impose more sanctions on Russia as they accuse Russia of amassing an invasion force on the border with Ukraine. The Sanctions will restrict Russian banks from raising capital in the EU and will ban western exports of energy technology to Russia. Russia is one of the world’s major exporters of Oil and these new sanctions will likely affect energy exports. The situation remains on a knife edge and could easily escalate, in which case the oil markets will feel the full effect.

Weak manufacturing data from many countries added to fears the global economy may be slowing down. HSBC’s Chinese Manufacturing PMI fell from 50.3 to 50.2 and the Japanese Manufacturing PMI fell from 52.4 to 52.2. Europe fared no better with the UK’s Manufacturing PMI falling from 55.4 to 52.5, Italy’s falling into contraction at 49.8 from 51.9 and, most importantly, Germany’s fell from 52.0 to 51.4. EU wide Manufacturing PMI dipped from 50.8 to 50.7. France’s provided a glimmer of hope, rising from 46.5 to 46.9, however remained firmly in contractive territory. There was real hope from the US as the ISM Manufacturing PMI rose from 57.1 to 59.0.

Further adding to Oil’s woes was the announcement that Libya has increased output. According to the State-run company National Oil Corp, output has increased to 710,000 barrels a day. Libya is on a long and arduous road back to being a major oil exporter after a brutal civil war.

Looking at the H1 chart for WTI Oil we can see it falling off a cliff. It fell from a high of 95.85 to a low of 92.67 in a matter of hours. It has regained some ground and currently sits just under the resistance at 93.26. The price appears to be consolidating just under this level and could break out. If this is the case look for it to retrace towards previous support/resistance at 93.93 and 94.51.

It would pay to keep an eye on the news coming up in the next few days that could add volatility to Oil markets. US Stockpiles data is due tomorrow and is expected to show a fall of 1m barrels. Intuitively, a fall should put upward pressure on oil markets, but they are notoriously fickle and can move opposite to what logic suggests. All these stats seem to do is to add volatility, which is just fine for short term traders. Also keep an eye on Nonfarm Payroll data due on Friday as this will give an indication of the health of the US economy, and thus demand for Oil.

Oil Markets have seen a return to volatility this week and that looks set to continue with more data out this week. Look for a potential retracement to previous levels of support.