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Oil Talking Points

Crude appears to be catching a bid as the United States restores sanctions on Iran, and recent price action raises the risk for a larger rebound as the Relative Strength Index (RSI) appears to be bouncing back from oversold territory.

Image of daily change for major financial markets

Oil Prices Risk Larger Rebound as RSI Recovers from Oversold Territory

Image of daily change for crude oil prices

In response to the Iran sanctions, it seems as though the Organization of the Petroleum Exporting Countries (OPEC) will pursue a produce as much you can mode’ over the remainder of the year, and the group may continue to react to the rise in protectionism as the U.S. and China, the two largest consumers of crude, struggle to reach a trade deal.

In turn, OPEC and its allies may continue to tame energy prices in 2019 as the Monthly Oil Market Report (MOMR) expects the slowdown in emerging market economies to drag on global consumption, and the pickup in volatility may continue to fuel a change in market behavior as retail interest pushes to extremes.

Image of IG client sentiment for crude oil

The IG Client Sentiment Report shows 84.1% of traders are net-long crude, with the ratio of traders long to short at 5.27 to 1.In fact, traders have been net-long since October 11 when oil traded near the $71.00 mark even though price has moved 15.7% lower since then. The number of traders net-long is 11.6% higher than yesterday and 54.1% higher from last week, while the number of traders net-short is 11.8% lower than yesterday and 11.0% lower from last week.

The ongoing accumulation in net-long interest offers a contrarian view to crowd sentiment as traders attempt to fade the weakness in oil prices, with the broader outlook for crude remains tilted to the downside as it now snaps the upward trend from earlier this year.

At the same time, the Relative Strength Index (RSI) also indicates a change in market behavior as the momentum indicator dips into oversold territory for the first time since 2017, but recent price action raises the risk for a larger rebound as the oscillator appears to be climbing back above 30. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

Oil Daily Chart

Image of gbpusd daily chart
  • Crude remains vulnerable as it extends the series of lower highs & lows from the previous week, with a break/close below the $62.10 (78.6% retracement) to $62.80 (38.2% retracement) region opening up the Fibonacci overlap around $59.00 (61.8% retracement) to $59.30 (78.6% expansion), which sits just above the 2018-low ($58.11).
  • However, the RSI may flash a bullish signal as it threatens the bearish formation from October and appears to be bouncing back from oversold territory, with a series of failed attempts to break/close below the $62.10 (78.6% retracement) to $62.80 (38.2% retracement) region raising the risk for a move towards $64.80 (100% expansion) to $65.30 (61.8% retracement).
  • Next topside region of interest comes in around $67.00 (50% expansion) to $67.50 (50% retracement) followed by the $69.10 (61.8% expansion) to $69.70 (38.2% retracement) area.

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.