Crude oil slumps, finally joins other commodities

Crude oil prices took a nosedive around midday in London yesterday, joining other commodities which have been falling sharply of late. Both contracts have extended their falls today with Brent trading around $77.20 and WTI around $68.80 at the time of writing.

Up until yesterday, crude prices had been outperforming other commodities. In part, this has been because of fears over potential supply shortages stemming from Iran due to US sanctions, and the current or previous situations in places like Libya and Venezuela limiting supplies in those nations. Most recently, oil prices rose on fears of supply disruptions in the US as a result of tropical storm Gordon, which has battered the US Gulf Coast and a state of emergency has been declared in Louisiana and Mississippi.

But oil prices fell yesterday as production loss from the storm Gordon was expected to be limited.

Meanwhile the prospects of increased supplies from OPEC and her allies, and weaker demand from China and other emerging markets could weigh further on oil prices going forward, or at least limit the upside potential.

Chinese demand fears may be a factor finally exerting downward pressure on oil prices. In recent months, metal prices have tanked mainly on concerns over slower demand from China. In part, this is because of the US dollar’s strength, weighing heavily on emerging market currencies, including the yuan, which in turn has pushed up the costs of all dollar-denominated commodities.

What’s more, Saudi Arabia has been expanding its oil production, which in August climbed to 10.424 million barrels per day compared to 10.288 million bpd in July. OPEC and its allies in June pledged to return to 100% compliance with their agreement to reduce combined output by 1.8 million bpd, after several members had over-complied and reduced their production more than was agreed upon.

Technical outlook turns bearish for both Brent and WTI

Both oil contracts formed apparent bearish price patterns following Tuesday’s reversal, suggesting that a near term top may have been formed for crude oil and that the path of least resistance is now to the downside again.

As can be seen, Brent formed a shooting star or inverted hammer candlestick pattern near the top of its recent range around $79.50, while WTI created a large bearish engulfing candle around the 61.8% Fibonacci retracement against its recent highs.

With WTI already underperforming, it is the US oil contract which could fall the hardest should prices now continue heading lower. There are a few short term levels we are watching on the downside where we may see some hesitation around, although we are not exactly looking for a quick reversal following Tuesday’s price action.

For WTI, the first potential support level is seen at around $68.35, which has been a pivotal level in recent trade. Below this, the next significant level is around $66.50, the base of the most recent breakout.

On Brent, the first potential support level comes in at $76.95, which was formerly resistance. The next potential support levels to watch below here are around $75.60, $74.85 and $72.90.

This bearish view will remain valid so long as prices remain below Tuesday’s highs and until we see some bullish reversal patterns emerged at lower levels at some point down the line, ideally around the one of the above-mentioned support levels.

Source: eSignal and Please note, this product is not available to US clients

Source: eSignal and Please note, this product is not available to US clients

Related tags: Brent Crude Oil China Oil OPEC

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