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Oil Price Outlook Mired by Rising Inventories, Shift in Retail Interest

Oil Price Outlook Mired by Rising Inventories, Shift in Retail Interest

David Song,
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Oil Talking Points

Crude tumbles to a fresh weekly-low as updates from the U.S. Department of Energy (DoE) show another sharp increase in oil inventories, and there appears to be a broader shift in market behavior as both price and the Relative Strength Index (RSI) snap the bullish formations carried over from August.

Image of daily change for financial markets

Oil Price Outlook Mired by Rising Inventories, Shift in Retail Interest

Image of daily change for crude oil pricesImage of DailyFX economic calendar

The advance from the September-low ($66.89) continues to unravel as U.S. crude inventories jump 6490K in the week ending October 12, and signs of slowing demand may keep oil prices under pressure especially as the Organization of the Petroleum Exporting Countries (OPEC) reduce their world oil demand growth forecast for 2019.

In response, OPEC and its allies may continue to regulate production over the coming months, and the group may show a greater willingness to extend their effort at the next meeting on December 6 especially as the U.S. sanctions on Iran go into effect in November. The threat for even lower supply may influence the long-term outlook for crude as the major producers remain in no rush to boost output, but the recent pickup in market volatility appears to have spurred a shift in retail interest, with the development warning of a larger pullback in energy prices.

Image of IG sentiment for crude oil

The IG Client Sentiment Report shows a recent change in retail interest as 67.5% of traders are now net-long crude, with the ratio of traders long to short at 2.08 to 1. The number of traders net-long is 1.3% lower than yesterday and 27.4% higher from last week, while the number of traders net-short is 4.7% lower than yesterday and 42.0% lower from last week.

The buildup of net-long interest suggests traders are attempting to fade the weakness in oil, while the net-short community appears to be taking profit, and a further shift in crowd sentiment may continue to offer a contrarian view as both price and the Relative Strength Index (RSI) snap the bullish formations from earlier this year. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

Oil Daily Chart

Image of daily chart for crude oil
  • Keep in mind, the broader outlook for oil no longer remains constructive following the break of channel support, with the RSI highlighting a similar dynamic.
  • Close below the $70.70 (50% retracement) to $71.00 (50% expansion) hurdle raises the risk for a move towards $69.10 (61.8% expansion) to $69.30 (61.8% retracement), with the next downside region of interest coming in around $67.00 (50% expansion) to $67.20 (78.6% retracement).
  • Next hurdle comes in around $64.80 (100% expansion) to $64.90 (38.2% expansion), which largely lines up with the August-low ($64.45).

For more in-depth analysis, check out the Q4 Forecast for Oil

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.