Bullish Crude Oil Analysis Premature

Crude Oil’s recent retracement has led to a bevy of analysts suggesting that, the good times are back again, but the economic reality is very different as the market volatility is set to continue.

Last week’s soaring WTI crude oil prices had investors and traders alike scratching their heads as the commodity rose over 10 percent, fuelled by a range of improving U.S. economic indicators. WTI prices subsequently rallied strongly and managed to close the week higher at $45.23 a barrel.

This was, however, followed by some strong volatility in Tuesday’s trading session which left the commodity down over 8.26% and sent some traders fleeing to safety. Despite the strong volatility, some analysts were immediately resetting their forecasts to predict a strong rally in crude. This is in spite of the mounting evidence that the retracement may in fact be nothing but a dead cat bounce.

It is clearly no coincidence that U.S. equities declined sharply over the same trading period that WTI experienced its sharp rally. Crude oil markets have become beset with fear and disinformation which feeds the current cycle of volatility. In particular, the potential for a China slowdown has become the primary subject of whispers around the financial community.

In using some parlance from The West Wing, one should never use the word recession in connection with government. Subsequently, talk of a developing Chinese `Bagel’ is enough to bring heart palpitations to even the most ardent energy trader. Regardless of your economic view, the reality is that most economic data is backward looking, so you often don’t know you’re facing a `Bagel’ until you are face first into a Reuben.

Comedy aside, the reality is that crude oil is a very good predicator of global economic activity and demand. What we are currently seeing is a significant decline in commodity prices across the board which is indicative of a lack of demand emanating out of China. Although we are certainly not at the point where an Asian recession is seriously contemplated, there are some concerning signs as industrial production and a variety of Chinese PMI’s decline.

Regardless of your view on the future of the global macro-economy, the reality is that, at least in the near term, strong GDP growth, above the average, is unlikely for the Asian power house. Subsequently, successive western nations that have hitched their respective wagons to the growth engine of China are about to discover some significant downsides.

In the context of an indicator of global economic health, crude oil is likely to face further volatility and downside pressure in the coming months. In addition, any price rally is likely to be self-defeating as additional rig activity increases along with the price.

So disregard the WTI price rally, rig count numbers, OPEC’s production controls, the removal of US export controls, and crude inventory figures as they are just noise in the market. Focus upon the medium term economic indicators and they are subsequently pointing to trouble ahead for the commodity and global economy.