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Market report 31/3/2022: Have oil prices peaked?

Source: Google Images

Today, oil prices dropped on news that US President Joe Biden is considering the release of 180 million barrels from the US's strategic petroleum reserve (SPR) following a spike in prices over the recent months. Over the past few months, oil prices soared to a high of over $130 per barrel following Russia's invasion of Ukraine and the unprecedented amount of punitive international sanctions on the world's second-largest oil exporter.

Multiple news outlets reported that the plan to cool soaring crude prices will involve the release of around 1 million barrels of oil per day for several months. This comes after OPEC+'s decision to modestly increase its output targets by 432,000 barrels per day from May 1. According to analysts at Goldman Sachs, the release of US oil reserves could help to cool off oil prices in the short term but not resolve the structural supply deficit caused by the shift away from crude oil production.

"This would reduce the amount of necessary price-induced demand destruction, the sole oil rebalancing mechanism currently available in a world devoid of inventory buffers and supply elasticity," Such a release would however, not result in a persistent source of supply for coming years and therefore not resolve the structural supply deficit, years in the making." Goldman Sachs, CNBC

Technical analysis

Crude Oil Futures 1D Chart

The Crude Oil Futures Daily Chart ($WTI原油主连 2205(CLmain)$) shows that oil prices are in a short term downtrend after soaring to $130 per barrel earlier this month. While it is difficult to predict the direction of the oil market in the long run, the cooling-off of prices following the release of US oil inventories could send prices lower in the short term. Momentum indicators also point to the loss in bullish momentum over the last couple of weeks which has room to fall even further following this piece of news. Possible support can be found at the $88 level which is also the 61.8% Fibonacci level and a past level of horizontal resistance.

Implications on the broader market

A pullback in oil prices would be bullish for (high-growth, tech) equities as it helps to alleviate some inflation concerns. Today, the core personal consumption expenditures price index (PCE), which the Fed uses to monitor inflation increased 5.4% from a year ago, its largest increase in nearly forty years. If inflation readings remain elevated, the Fed could be forced to move up its rate hikes which present a challenge to high growth stocks. Therefore, investors in these high growth names are hoping for a pullback in oil prices as it could help to soothe inflation concerns and prevent the Fed from aggressively hiking interest rates.

Disclaimer: For investors trading during this period of high volatility, proper risk management including the use of stop-losses and position sizing should be exercised as a form of caution. Conduct your own due diligence before entering into a trade/investment.