Fundamental Forecast for <USOIL>: Bearish
Fundamental Crude Oil Price Talking Points:
- The ONE Thing: Are we there yet? At the bottom that is. Signs are not pointing that the answer is a yes despite $50/bbl being a nice round number for WTI. Russia appears happy with current levels and demand may continue to wane as multiple outlooks for 2019 may show the demand for oil may follow suit.
- Backwardation in the futures curve is a thing of a past. We now see contango on the chart indicating that there is no longer a perceived supply shortage, which held the market higher earlier in the year, but that the costs to buy now and hold until need are increasingly exceeding the benefit to hold.
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- Per BHI, U.S. total rig count falls three rigs to 1076 from 1079; US Oil rigs rise by two to 887
- The December OPEC meeting in Vienna will answer the dilemma Saudi faces about whether to support the price of oil and fiscal health of OPEC company including their own or appease US President Trump’s request to keep oil prices lower by continuing to pump.
- The technical picture: Selling rips appear to be preferred below the rising trendline that was aggressively broken in this Q4 bear market in oil shown on the chart below. New targets surface at $42-39, which becomes increasingly likely if US Dollar strength can continue.
Data Source: Bloomberg
Where do we start? In the first week of October, WTI crude oil traded to a four year high at $76.80/bbl. Before trading closed on November, WTI fell below $50/bbl with November seeing WTI fall by the most in a month in ten years.
Add to the sharp drop that the global data narrative is shifting to slower growth, debt downgrades of previous stalwarts in the BBB-class and the crude futures market has seen a sharp shift into contango where the front-month Brent contract is now trading at an increasingly steep discount to later-dated contracts. Two months ago, this was not the case at the front part of the curve.
Brent Contango Curve Shows Steepness Indicating Oversupply Outpacing Demand
Will OPEC Save The Day Or Muddy The Waters?
Next week will see OPEC+, which includes OPEC’s 13 members and strategic alliances like Russia to discuss whether to double down on production curbs or keep pumping to keep US President Trump happy who has ‘demanded’ lower prices.
Late last week, Russia said that the current system is working well, which seems to pour cold water on the theory that Russia would formally join OPEC to support the cartel’s interest in the oil market. Naturally, will take place after the G20 meeting in Buenos Aires, Argentina where the three key variables in all this in Donald Trump, Mohammed bin Salman, & Vladimir Putin will be though no formal talks will be held on them there. However, the outcome of the G20 with Trump & Xi’s dinner may influence the ton and decision on December 6.
Technical Analysis Shows Crude May Have Topped in Early October
Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT
Lower for longer is not a happy phrase in commodities. The longer-term chart above however, seems to favour that argument with weekly MACD divergence now having given way to the sharpest monthly drop in ten years and has since broken below a trendline from the 2016 and 2017 lows in aggressive fashion.
The weekly chart above shows that the 2016 to 2018 rally has likely been a bear market multi-year rally, and the trendline break may have set the table technically for a move toward the lower $40-barrel zone that was supported in 2016/2017, but the overall target may be lower still.
Short-term resistance sits at $52.80, which is a polarity point (support turned into resistance) over the last few weeks. A break and close on the daily settlement above there would favour that a larger reprieve could be in store, but the next key resistance would likely be $58/bbl that is the trendline resistance point.
Next Week’s Data Points That May Affect Energy Markets:
The fundamental focal points for the energy market next week:
- Saturday: Trump, Xi Jinping meet at G20-summit
- Monday: Joint Technical Meeting of OPEC+ committee in Vienna thatwill report on the compliance with OPEC+ deal
- Tuesday 16:30 ET: API issues weekly US oil inventory report
- Wednesday: Joint Ministerial Monitoring Committee meeting, Vienna
- Wednesday 10:30 ET: EIA weekly U.S. oil inventory report
- Thursday 0400 ET: In Vienna, OPEC ministers gather for a formal ministerial meeting (10:00 Vienna)
- Friday: OPEC, non-OPEC meeting
- Friday 13:00 ET: Baker-Hughes Rig Count
- Friday 15:30 ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts
---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 trading educational resources. Read more of Tyler’s Technical reports via his bio page.
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