Crude oil analysis: WTI could be heading to low $50s soon

Crude oil analysis: What does the Venezuela news mean for WTI?

 

The big news in the energy market this week has been the Venezuelan oil story. Crude prices have taken a drop after President Trump said the US is to take control of up to 50 million barrels of Venezuelan crude, adding to already oversupplied market. The White House says Venezuela is to continue supplying oil to US ‘indefinitely’. US Energy Secretary Chris Wright today added that Washington will take over the sale of Venezuelan crude, with funds deposited in a US-controlled account to benefit the Venezuelan people. Obviously, the details are unclear at this stage, but the big takeaway point is that sooner or later, more oil will be pumped out. Assuming everything else being equal, this will only translate into lower crude prices. I’d imagine it would take Venezuela considerable time to rebuild production to levels of the past. If we see a smoother recovery in Venezuelan oil output, this would be mildly bearish for oil prices amid concerns over excessive supply of the stuff. In turn, that could hurt the Canadian dollar, which has benefited from the absence of Venezuelan heavy crude.

 

How will the OPEC respond?

 

As mentioned, expectations over increased supplies are the main driver behind oil prices, assuming all else is equal. But everything may not stay equal. For one, the OPEC might react by adjusting its production levels to help support prices. So far, we haven’t heard anything from any of the major players like Saudi. In any case, the OPEC won’t be making any hasty decisions, given that they have only recently started to allow withheld supplies to return to market. Any decisions the OPEC will make will have to account for the potential for Russian oil sanctions to be at least partially removed – if a peace deal can be brokered in the Ukraine conflict. So, the OPEC’s hands are a bit tied and they may have to accept the fact that oil prices are going to go lower.

 

What about oil demand?

 

Thus, it looks like the only thing that could save prices from collapsing is we see a surprising strong recovery in the global economy. While that looks unlikely, there are a few reasons to be optimistic about growth potentially improving. Among other reasons, inflation seems to have stabilised in at least some of the major economies likes the US and Germany. And thanks to lower interest rates, lower energy prices and the potential for business confidence to improve now that the tariffs uncertainty has been sharply reduced, growth may start to pick up faster. But the demand side of the story will take a long time to come to fruition and in any case crude oil is a supply-driven market. This should mean continued weakness for oil prices in the foreseeable future.

 

Technical crude oil analysis: WTI eyes breakdown

 

WTI formed a reversal-type candle on the daily chart after failing to break resistance at around $58.50 yesterday. This level had capped gains in the prior days before the Venezuelan news hit. The reversal suggests that oil prices remain vulnerable to a potential drop below the $55 support area, which could be significant from a technical perspective.

 

 

This $55 area marks the base of the rally in oil prices that began in April. WTI  tested it again in May, once more in October, and finally in December, when prices briefly broke below the April low around $55 before staging a minor rebound. However, it now looks as though the broader trend has resumed, with prices breaking below $57, which is now the immediate resistance level to watch on the upside. At the time of writing, this level was being tested from underneath. It had acted as support over the last few days, and now we are seeing resistance there.

 

As a result, there is a possibility that crude oil could reverse lower from this area and move further down. The $55.00 support zone has been tested multiple times, and the more often a level or area is tested, the more likely it is to eventually break.

 

Could we therefore see a breakdown below the $55 level in the coming days, potentially as early as this week? That is the key risk facing crude oil. If prices do fall below $55, the next question is whether the market can hold below that level. If it does, then $50 could become the next downside target, which is obviously around $5 lower from here.

 

That said, if we see a brief breakdown followed by a quick reversal—such as a hammer-style candle forming on the daily chart—that would be a potential reversal signal. We will address that scenario if and when it appears. For now, the trend is clearly bearish, so the focus remains on the downside rather than the upside.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R