Will oil fall below $70 or is now the time to go long?

Oil prices have slipped significantly, with Brent crude hovering around $72 (USD). A challenging demand outlook, coupled with sinking product prices, is casting a shadow on the market. Signs of economic slowdown in major economies like China and the US, alongside a weaker-than-expected manufacturing sector, are raising concerns about a potential decline in oil consumption.

Meanwhile, the ongoing conflict in Gaza and the diplomatic efforts to secure a cease-fire add another layer of complexity. While a cessation of hostilities could ease geopolitical tensions, the uncertain path forward leaves traders on edge.

OPEC+ balancing act

The oil market has shed all of its year-to-date gains, as the impact of OPEC+ supply curbs has been overshadowed by a less-than-ideal economic outlook. Although the cartel, led by Saudi Arabia and Russia, plans to ease some output curbs in the fourth quarter, the recent price slide could complicate this strategy.

Analysts at Morgan Stanley predict a softening balance in the market, potentially turning to surplus in 2025 as demand slows after the summer driving season and both OPEC and non-OPEC supply increase.

Technical signals and market sentiment

Oil market timespreads, indicating less-tight conditions, are further fueling the bearish sentiment. The gap between Brent's two nearest contracts has narrowed, signaling a potential easing of supply constraints.

All eyes are now on Federal Reserve Chair Jerome Powell's speech at the Jackson Hole symposium. His remarks on US monetary policy could impact the dollar and, consequently, the wider energy demand.

Conclusion

In the past, any geopolitical friction in the Middle-East triggered oil rallies, but it’s not looking that way this time. Having said that, the conflict affecting oil prices is still someone mute. Peace talks are still on the table. Only when that communication breaks down does the market react, and that hasn’t happened yet. An escalation could raise oil prices, but the traditional relationships between energy and politics seems to be changing… so be cautious. Here’s a few tips:

• Consider potential short positions on oil if the bearish trend continues.
• Watch for opportunities in alternative energy sectors as the world shifts towards greener solutions.
• Stay alert for sudden market swings triggered by geopolitical events or unexpected economic data.
• Maintain a balanced and diversified portfolio to manage risk effectively.