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Is it safe to buy crude oil after plummeting -33% from 2022 highs?

By:
on Nov 22, 2022
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  • Crude oil prices declined by more than -33% from their 2022 highs
  • Futures have reached levels where the White House is interested in replenishing the SPR
  • Fears of a global recession in 2023 might push the WTI crude oil price even lower

Oil traders were in for a wild ride in 2022. After trading above $120/barrel in the first half of the year, the WTI crude oil price fell by -33%, a stunning drop by all standards.

Sure enough, central banks were happy to see the price developments. High oil prices fuel inflation, and inflation has been a major problem for price stability worldwide.

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Why did the price of oil collapse?

Commodities like oil are strongly dependent on supply and demand. Therefore, by rightly anticipating the changes in supply and demand, traders have an educated guess of where the price of oil might go next.

One of the reasons for the collapse in the price of oil is the release of oil reserves in the United States. Only last week, the United States released 1.6 million barrels of oil from its SPR (Strategic Petroleum Reserve).

While a big number, it is the smallest weekly release since February. It brings the SPR to levels not seen since the 1980s of about 390 million barrels.

The futures for 2024-2025 now trade in a price range that the White House indicated it would be interested in buying to replenish the SPR. Hence, if anything, oil prices might bounce on an important buyer shopping around.

But traders should consider something else regarding the demand and supply of oil. Oil has long been connected with economic recessions and expansions.

As such, it could very well be that the recent decline in price reflects investors’ worry that the global economy will enter a recession in 2023. If that is the case, more price declines are in the store for the months ahead.

Double top formation confirmed by recent price declines

A double top is a reversal pattern. It forms at the end of bullish trends, and traders use it as a confirmation that the bullish trend ended.

Moreover, once the price reaches the pattern’s measured move, the assumption is that a new, opposite trend has started.

In other words, now that the measured move was achieved, the focus shifts to the series of lower lows and lower highs that defines a bearish trend. Until it is broken, more downside should be expected.