WEST Texas Intermediate (WTI) crude oil remains under pressure, and is shaping up for another disappointing month in December 2022 when prices are down about 6 per cent thus far, following the decline posted in November. On Dec 7, 2022, the commodity closed at a new year-low level. The question now is whether the longer-term trend has changed for the WTI, given the big decline for the commodity since June, as prices peaked at the start of the Russia-Ukraine war.

The American Petroleum Institute showed a weekly crude oil stock drawdown of 6.426 million barrels on Dec 6, much greater than the forecast 3.884 million barrels. Data from the Energy Information Administration showed that crude oil inventories registered a drawdown of 5.187 million barrels, exceeding the 3.305 million barrels forecast on Dec 7. Despite the greater than expected drawdowns in oil implying a stronger demand, which is theoretically bullish for prices, this has not been enough to overcome global recessionary fears.

In other news, the Keystone oil pipeline, which has the capacity to haul more than 600,000 barrels of crude daily from Canada into the US, has also been shut down due to the largest crude oil spill in roughly a decade, with no estimated timeline given for resumption. Hopes for a positive China re-opening situation, where demand for crude oil should theoretically increase, were also brushed aside by the market as the outcome seemed to be largely priced in, along with the worsening Covid-19 situation in China. Another factor relating to the uncertainty in crude oil prices was the European Union’s G7 price cap on Russian oil, where supply cuts that could potentially provide a boost to crude oil prices have yet to take place.

A combination of more hawkish Federal Reserve policy expectations and rising recession concerns have also been weighing on energy prices. The closely watched spread between the 10-year and two-year Treasury yields continues to invert, which is often seen as a leading recession indicator. This leaves the global slowdown rhetoric at the forefront of price limitations for crude oil. With further interest rate hikes scheduled, we expect both consumer demand and economic growth to be negatively affected.

Looking at the chart for WTI oil, there are displays of bearish signals as well. A death cross was recorded in September 2022, where the 50-day Simple Moving Average (SMA) made a bearish crossover below the 200-day SMA, signalling the transition from a bullish to bearish oil market.

Furthermore, the commodity broke a bearish rising wedge formation not long after the death cross formation. The price has also retested the key uptrend support line that dates back to 2020. Using the 2020 swing low of US$35 and the peak of US$110 this year, crude oil could be set for a further retracement to the 61.8 per cent Fibonacci retracement level of US$64, which was also a prior resistance zone now turned support.

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In conclusion, despite the stronger than expected demand for crude oil, supply pressures and news of a positive re-opening of China’s borders have shifted market focus to global recessionary fears that taper demand for the commodity instead. Given the confluence of bearish signals present in the price chart, WTI crude oil could face further losses ahead.

The writer is research analyst at Phillip Securities