Oil markets pulling back following yet another economic downgrade

Although the oil markets managed to bounce slightly higher towards the conclusion of last week following comments that the weaker price would be positive for demand, alongside optimism that non-OPEC members might produce less oil than originally forecast this year, the commodity is already reversing gains during the early part of the current week. After extending as high as $49.11, the price of Crude has already dipped to $47.47. Brent has also withdrawn gains, with the commodity pulling back from $50.31 to $48.42.

The reason for the pullback has largely been because the economic conditions have yet to change, meaning there remains a supply surplus of a reported 2 million barrels a day and until this is significantly altered, the chances of a recover in price will be very low. Optimism in the global economic recovery is also continually being knocked back and this not complimenting any suggestions that the weaker price will be positive for demand. In fact, it is having the opposite impact.

There was another economic downgrade from the IMF last night and this is going to lead to suspicions that – with the global economic forecasts repeatedly being downgraded – there will be reduced demand for oil. It is no coincidence at all that each time we receive an economic downgrade, or concerning data from a large oil consumer like China, that the oil markets come under bearish pressure. Overall, if we continue to receive economic downgrades that lead to suspicions of weaker demand for the commodity and fail to see any indications of reduced production, it’s more likely than not that we will be at risk to recording new lows in the oil markets before even considering a stabilization in prices.

As we open the European trading session global stocks are mainly pointing to the upside with this being due to a combination of the overnight China GDP release encountering a largely positive market reaction, alongside European stocks continuing to rally on the hopes that the European Central Bank (ECB) will introduce QE this Thursday. In regards to the China GDP, the data appeared strong and this will lower the recently elevated concerns that a slowdown in economic momentum might have been accelerating as 2014 concluded. There was also a surprise to the upside with the retail sales and industrial production figures for December, which should reduce concerns over domestic momentum and limit expectations for the People’s Bank of China (PBoC) to ease monetary policy further.

The negative GBP sentiment that is reducing investor attraction is continuing to lead to GBPUSD losses, with the pair already declining by over 160 pips during the early part of the week. With the BoE minutes released tomorrow and the heightened chances that the recently announced 12-year low inflation would have further strengthened the Monetary Policy Committee’s (MPC) already resilient views on inflation is making investors wary of purchasing the GBP. If the BoE minutes suggests that any possibility of a UK interest rate rise could be pushed back until 2016, this pair is likely at risk to dropping below 1.50 for this first time since the 10th July 2013.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

Follow Jameel on Twitter @Jameel_FXTM

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