Whenever an asset rises in value — whether cryptocurrencies, stocks, gold price, or even oil — the question naturally arises: What is driving this rise, and when can we expect a pullback?
If there are solid fundamental reasons behind the rise, the growth may continue. But if the move is fueled primarily by emotions and speculation, a correction is likely.
Take oil prices; for example, WTI and Brent rose more than 6% last week after months of decline. Many are wondering if this is just a short-term bounce or the start of a new trend.
To understand whether we are talking about a real change in market sentiment, it is essential to identify what has caused the change. If we look deeper, several factors have contributed to this momentum.
First, at the end of September, China implemented bold measures to boost its economy, thus achieving the goal of 5% growth this year and supporting the stock market, which had only disappointed investors.
The list of coordinated measures announced by the PBOC included a 20 basis point cut in the 7-day reverse repo rate and a 0.5% reduction in the reserve requirement ratio (RRR).
Additionally, there’s a 500 billion yuan liquidity injection to support the stock market, enabling securities and insurance firms to invest in equities through central bank loans, among other initiatives.
All this has led investors to believe that demand for commodities, especially metals and oil, could increase, bringing a wave of optimism to the markets and subsequently pushing quotes higher.
The second reason for the bullish sentiment seems to be the US: first, the Fed cut rates by 50 bps, and then we got some solid economic data showing that the economy is holding up well.
In September, for example, the U.S. created 254,000 new jobs, up from last year's average of 203,000. In addition, GDP growth forecasts indicate that a recession is unlikely in the near future.
Finally, geopolitics played a role, with tensions rising in the Middle East, particularly on concerns that Israel's response to Iran could affect global oil supplies, and not for the better.
Overall, the fundamentals favor a positive outlook for the oil market. However, it’s important to remember that many market players can quickly increase production if necessary.
With the latter in mind, it is prudent to be wary of predictions that oil prices will soar above $100. At the same time, betting on an early correction amid geopolitical risks also carries its risks.