Fundamental Forecast for USOIL: Neutral
- Hedge Funds have yet to capitulate, which leaves Oil susceptible to further drops
- Per BHI, U.S. Oil Rig Count 791, up from 765 the previous week, an addition of 66 rigs
- Crude Oil Price Forecast: Price Near 3 Yr. Highs On Strong US Demand
- IGCS showing net-short retail positioning in WTI - US Oil, market has traded 12% higher since signal emerged
This sell-off is not like other sell-offs we’ve recently seen, and the reason is simple. Underlying global demand is as strong as it has been in at least eight years. Data from China General Administration of Customs showed that China’s oil imports in January were the most in the world since 2010, and that’s putting institutions and individuals that are long crude oil in a difficult spot.
The surge in volatility across multiple asset classes means that assets with strong fundamentals are being sold. The selling takes place either to free up liquidity or due to algorithms that look for sell-offs in correlated assets as a heads up to get out while the getting’ is good.
However, if you look to other markets like bonds and equities, commodities like crude oil are likely the envy and seem to be supportive of the price rise since mid-2017. While production in the US is aggressively high, it’s being met with similar demand, which could mean that the weakness in assets could be shortest-lived in crude oil.
Options data is showing only mild bearish exposure building, with WTI puts toward March $60-57. However, longer-dated Brent calls continue to focus on a move to and through $70, and up to $80 by mid-year.
The overall message being here that the drop in the price of oil is likely more collateral damage to the global risk-off move as opposed to the historical reason of oil weakness that was driven by obscene over-supply relative to demand.
The key risk appears to be not the fundamental data, but the positioning data, which shows hedge funds continue to hold historic long positions. A capitulation, or panic-selling, would see prices drop aggressively despite supportive fundamentals. For that, we’ll look at the charts.
There’s a global rise in oil demand! Click here to see our Q1 forecast on what outcomes we're watching!
The price charts for Crude oil show the biggest price slide in 11-months after a steadily rising trend began in mid-June.
Recently, the price of WTI Crude (US oil) broke below the 55 (Fibonacci sequence)-DMA at $60.90/bbl. However, given the aggressive rise since August from $45.62/bbl, traders should note that a healthy technical pullback of 38.2% of the impulsive move would still take the price of Crude to $58.60/bbl. A move to this level would also have the price sitting in the Ichimoku Cloud (bullish price support), as well as the price zone of the prior correction.
Learn how to utilize Ichimoku Cloud in our FREE guide here
A break below the 50% level of the move from August to late-January at $56.13 would begin to concern bulls (including me) as it could show that fundamentals are taking a backseat to aggressive selling mentioned early by institutions. It would not signal to me that the trend is over, but rather, we’d have to likely wait longer before its resumptions.
Crude Oil Price Favored To Advance on Pull Backs Above The 38.2% Retracement ($58.60/Bbl)
Chart Created by Tyler Yell, CMT
Next Week’s Data Points That May Affect Energy Markets:
The fundamental focal points for the energy market next week:
- Sunday (Day 1 of 3): World Government Summit in Dubai including U.A.E. Energy Minister as speakers
- Monday 6:00- 7:00 AM ET: OPEC’s Monthly Oil Market Report
- Tuesday 4:00 AM ET: IEA Monthly Oil Report
- Tuesday 4:30 PM ET: API issues weekly U.S. oil inventory forecast
- Wednesday (time unspecified): IEA-IEF-OPEC Symposium on Energy Outlooks with OPEC Sec-Gen Barkindo speaking alongside IEA Exec. Director, Fatih Birol
- Wednesday 10:30 AM ET: EIA weekly US Oil Inventory Report
- Fridays 1:00 PM ET: Baker-Hughes Rig Count at
- Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts
Crude Oil Insight from IG UK Client Sentiment:: Contrarian view of retail positioning favors upside
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil - US Crude prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current Oil - US Crude price trend may soon reverse lower despite the fact traders remain net-short.
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