Crude oil slumps
Fawad Razaqzada March 8, 2017 6:57 PM
A correction of some sort in crude oil prices seemed inevitable and this may well have started today with both contracts falling nearly 4% each. As we reported the possibility on Friday (see the details HERE), Brent has fallen to $54 and WTI to $51 a barrel. The rising crude inventory levels in the US to new all-time highs has been the number one reason why prices have been unable to move further higher after the OPEC had agreed with some non OPEC members to limit production back in November. Expecting higher oil prices, money managers and other large speculators have been increasing their bullish bets to record high levels – until last week. As we had anticipated, these market participants sharply reduced their long positions last week, as evidenced by the latest positioning data from both the CFTC and ICE. They are likely to have further reduced their holdings following today’s oil price drop.
Today’s big drop in oil prices was hardly surprising. According to the US Department of Energy, oil inventories rose by a much larger-than-expected 8.2 million barrels last week to a new record level. This was the ninth consecutive weekly rise. Crude production has meanwhile climbed to a new 13 month high. Not all aspects of the oil report were bearish, as stocks of gasoline saw an unexpectedly sharp drop of 6.6 million barrels – the highest drawdown since April 2011. But this failed to offer any support.
As a result of rising US oil production, the OPEC is losing market share. But surely they won’t do a U-turn now. Their response may very well be a continuation of corporation to limit their oil production, perhaps for a little longer than they had hoped. This should help keep a floor under oil prices. Indeed, despite today’s sharp sell-off, I remain bullish on oil and still expect to see $60-$70 a barrel by the year end. As before, the key risk to this view would be if we see an acceleration in US oil production relative to the demand growth. In such a scenario, oil prices will struggle to get very high.
As we go to press, both oil contracts were testing their long-term support levels: Brent at around $54 and WTI at around $51. While a breakdown below these levels may be forthcoming, given the size of today’s price drop I wouldn’t be surprised if the sellers booked some profit at or around these levels now, potentially leading to a short-covering bounce later on. It is possible for prices to test the liquidity zones below these levels before potentially bouncing back. But until we see distinct reversal patterns, the short term path of least resistance is to the downside on both contracts now. The long-term bullish trends would technically end if and when oil prices create significant lower lows.
Source: eSignal and FOREX.com
Source: eSignal and FOREX.com
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.