UK Oil has been tumbling over the last week after the Federal Reserve rate hike and comments led to a risk-off environment.
Traders are fearful of the prospects for global growth as central banks slam on the brakes with big interest rate hikes across the board. Another issue for Brent crude will be the recent government financial decisions.
4H Chart for UKOIL
UK Oil prices have slumped to test the bottom of a descending channel line. The breach of that line risks further losses to Brent crude. However, it may provide a support level if financial markets can settle this week. At the moment, sentiment is weak, and the downside is favoured.
The recent government package to promote growth in the country has raised eyebrows in the financial markets, and the effects have been hard on the pound sterling. Analysts have talked of the need for emergency action from the Bank of England to halt sterling’s decline.
However, the BoE released a passive statement today that sent the pound crashing to 1.03 versus the US dollar. The bank said on Monday it would not hesitate to lift interest rates and was monitoring markets “very closely” after the pound plunged to a record low and bond prices collapsed. Finance minister Kwasi Kwarteng released a so-called mini-budget that was designed to boost growth but has raised concerns about the UK’s debt levels.
On one hand, UK oil is now cheaper for overseas investors to buy and there will be demand for crude. On the company side, oil companies can hedge some of their windfall taxes with the new corporate tax rate cuts. Yet the real problem will be in investment as those companies also release their financial statements in US dollars, and they will fetch less from UK projects. The other issue is that overseas oil companies may start to see the UK as an unsafe investment environment. The disruptions in the oil market created by the war in Ukraine and the European sanctions on Russia have added some support to oil prices.
Attention will now turn to the next meeting of the Organisation of the Petroleum Exporting Countries (OPEC) on October 5. The group agreed to a modest production cut during their last meeting. But, since OPEC+ is producing at levels below its output target, any cut may not have much impact on supply.
