Commodities forecast: Oil price oversold?

Growth will slow sharply over coming months

With no end in sight to the Eurozone crisis even after the Greek election, and the US economy starting to show some signs that it may slow over the summer months it’s hard to have a bullish outlook for commodities.

However, after approaching a 17-month low at approx. $95 per barrel, is the oil price oversold?

Commodities have sold off very sharply since peaking in late May.

The oil price was above $120 per barrel this time a month ago, so what changed to cause investors to sell the commodity?

In contrast to other risky assets like the euro and the Aussie dollar, which have both managed to stage a recovery since the start of June, the oil price has continued to come under downward pressure.

We believe the oil price has come under sustained pressure for a couple of reasons: firstly, there is a real fear that growth will slow sharply over the coming months with the Eurozone debt crisis, the weak economic data out of the US and signs of a slowdown In China all threatening the future trajectory of oil demand.

These three regions are central to oil demand so when they are doing badly the oil price will suffer.

Secondly, the Eurozone debt crisis is likely to continue to rage on for some time, which may keep investors away from the commodity sphere.

Although there has been some calm in the Eurozone debt crisis in recent days, unless global central banks start pumping their economies with liquidity in the form of more stimulus then we could see the oil price continue to suffer in the medium-term and Brent crude could fall towards $90 per barrel, the lowest level since December 2010.

The writer is Emea Research Director at FOREX.com

Image from shutterstock

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