Cracks In Crude Oil Bull's Resolve Just Broke Wide Open - What's Next?
Axi | Mar 09, 2017 10:24
Originally published by AxiTrader h2 Key Takeaway/h2
Crude oil benchmarks collapsed more than 5% overnight.
That appears to be after a number of factors combined into a perfect storm for crude.
The EIA reported another much bigger than expected build in inventories - 8.2 million versus 1.66 expected. We have an extremely long market. There was a breach of a 3-month trendline. And the changed tone in the overall discussion about the future oil prices all combined to see demand evaporate.
WTI prices are now at the bottom of the $5 dollar range we've seen for the past 3 months or so. But the risk is lower prices to test the support line which harkens back to the lows of 2016.
h2 What You Need To Know/h2Earlier this week I wrote a piece wondering "are the oil market's bulls finally running out of puff?" I won't reprise that note other than to say the massive builds in open interest and net speculative longs is both a key source of the big fall last night and a possible driver of further instability.
Instead let's focus on what the Kuwaiti oil minister said last night and how it fits with what his counterpart from Saudi Arabia said the night before last.
As I noted recently the chatter about extending the production cut suggested that the OPEC/non-OPEC deal was taking longer to bite than I sense the Saudi’s would have wanted. That’s especially important because while OPEC’s compliance is 140% in February according to Kuwaiti oil minister Essam Al-Marzouq he said non-OPEC was languishing at 50-60%.
But the really important point he made – one that Saudi oil minister Al-Falih pointed out the other day – is that it’s because of the Saudis deep cuts, much more than they agreed to undertake, that there is any compliance at all. Al-Falih warned against other countries free-riding on the OPEC – its – deal.
So as I warned when the January numbers were released, this is really all a Saudi-engineered and driven deal so if they lose patience oil all bets will be off for the bulls.
Now I don't expect that to happen - the Saudis are selling part Aramco via an IPO soon and will want to maximise the value of the kingdom's asset. But if folks in the oil game get a sense that this is the only reason the Saudis are playing ball they will quickly discount the production cut and current prices.
Throw in another cut in demand growth - like we saw from the EIA Tuesday night - and the price dynamic around supply and demand materially change.
But let's not get too bearish just yet.
WTI is close to, but hasn't yet broken, the bottom of the range oil has been trading in over recent months between $50.00/$50.50 and $55.00/$55.50.
Get The App
It's extremely vulnerable given all of the above. But it is a little oversold in the very short term. There is every chance though that traders will want to test the level of support below $50 at some point soon
And even though OPEC has proven itself a great jawboner of price over the past year there is every chance traders will want to test the level of support below $50 at some point soon.
That makes the $48.70 region very important. It's both the uptrend line from last years lows and also the 50% reteacement of the most recent upmove.
Here's the chart:
This is only a tentative line as it has only had two touches. But teh McKenna Mantra is to always repect trendlines and levels unless or until they break. So I'll be doing that again on this one.
Have a great day's trading.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.