This week has been fairly directionless for commodities, with the Brent oil price trading between $110 and $106 per barrel.
This has followed other asset markets like FX, where risky assets have had a bit of breather after some sharp sell-offs in recent weeks.
Even though the fundamental picture is still weak as we await the outcome of next month’s Greek election, asset prices don’t go down in a straight line so this price action is very normal.
But where will the oil price go next? If we get some pre-emptive action from the European authorities to try and limit the destruction wreaked by a Greek exit from the currency bloc, then we could see risky assets like oil snap back quickly, also known as a short squeeze.
But if Greece leaves the Eurozone unaided then we could see further declines.
We think the first scenario is more likely, although gains in oil could be limited due to the weak economic picture.
The Eurozone’s economy is expected to contract this year even if the Greece situation doesn’t get critical.
We could see Brent slip below $100 per barrel, especially if the US starts showing signs of slowing down.
The key things to look for when trading oil and other commodities right now is 1, the outcome of the Greek crisis and 2, action by global central banks to try and cushion the fall.
We have already seen the Australian central bank and the Chinese authorities loosen monetary policy, the Federal Reserve in the US has also kept the option of more QE on the table.
Since risky assets like commodities tend to rise in value when monetary policy is loose, it’s important to know what global central bankers are thinking as the crisis in Greece rages on.