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Title: Crude Falls On Boost In U.S. Production, Anticipated OPEC Supply

Title: Crude Falls On Boost In U.S. Production, Anticipated OPEC Supply

2018-05-28 23:59:00
Tyler Yell, CMT, Currency Strategist

Fundamental Forecast for <USOIL>: Neutral

Crude Oil Price ForecastTalking Points

  • The ONE Thing: Short-term pain may be in store, but long-term gain remains likely. The global economic drivers continue to show impressive economic growth and the US continues to show an economy that is growing above trend. While recent news of increased US and likely OPEC+ supply has taken the immediate premium out of the market, the longer-term bullish view holds for now.
  • Per BHI, U.S. Oil Rig Count rises by 2 to 861, US total count at 1,060
  • Crude Oil Price Forecast: Brent Premium Favors OPEC Induced Volatility
  • The technical analysis picture of crude oil has a focus on the $64.73/bbl. A breakdown below the Ichimoku cloud would open up a move to the April/ March lows of $63/$60.

The last few weeks have not been as kind to Brent & WTI crude bulls. A confluence of factors that limit the premium that had been witnessed in the futures market includes likely increase of supply from OPEC and their allies, rising US Rig counts that has led to higher US production and record US exports.

Traders have best seen the increase in production by witnessing the widening spread between WTI-Brent. The spread has widened to the most since 2015. However, it is hard to argue that the economy is about to move into a production-led or consumption-led drop. The consumption per the ISM data on Friday was incredibly strong despite higher input prices and at the same time US consumer confidence remains robust.


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Data source: DoE, Bloomberg

Mixed Signals

Markets often keep traders humble as multiple factors drive a market at any one time and the weight of those factors are often quite dynamic. Currently traders are focusing on a stronger US Dollar and a flip from backwardation in the near-month futures contracts to contango showing the premium from a near-term shortage is easing.

However, adding to the confusion is the open interest in options markets that are showing bets that crude will continue to rise. Thursday saw October Brent $100 calls options that expire in August per Bloomberg. If these pay out, we still have a lot of upside to go and dips would only be opportunities as opposed to harbingers of more pain.

Crude has nearly erased May’s Gains With ~3.5% Drop Last Week

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Data source: Bloomberg. Created by Quasar Elizundia

Once again, WTI and Brent crude has become the market everyone is discussing! Unlock our forecast here

Crude Oil Technical Price Analysis: WTI Touches Support

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Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

The sharp pull-back is seen well with RSI(5) on the Daily chart. The RSI(5) has hit the lowest point since crude began its impressive in June. However, the price currently remains above deep support as provided by the Ichimoku Cloud and the median line of Andrew’s Pitchfork.

Technical resistance, which is important given the reversal is coming off of 3-year highs would be at $69.33/bbl, which is the 26-day midpoint. Additionally, a break below $64.23 would open up a move to the April/ March low between $62-$60/bbl.

Not familiar with Ichimoku? You’re not alone, and you’re in luck. I created a free guide for you here

Next Week’s Data Points That May Affect Energy Markets:

The fundamental focal points for the energy market next week:

  • Saturday: Energy ministers from Suadi Arabia, UAE & Kuwait meet in Kuwait City to discuss OPEC plans
  • Tuesday: Platts Global Crude Oil Summit in London with Goldman Sachs, Trafigura execs
  • Tuesday 4:30 PM ET: API Weekly Oil Inventories Report
  • Wednesday 10:30 AM ET: EIA issues weekly US Oil Inventory Report
  • Friday: G-7 Leaders’ Summit in La Malbaie, Quebec
  • Friday 1:00 PM ET: Baker-Hughes Rig Count
  • Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts

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---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

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