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Oil Talking Points

Oil prices trade near the monthly-high despite signs of waning demand, and efforts by the Organization of the Petroleum Exporting Countries (OPEC) to stabilize the energy market may generate a larger correction in crude as it breaks out of the downward trend from late-2018.

Image of daily change for major financial markets

Crude Oil Breaks Out of Downward Trend Following Oversold Reading

Image of daily change for crude oil prices

It seems as though OPEC and its allies will curb production throughout 2019 as Saudi Energy Minister Khalid Al-Falih insists that he ‘would not rule out calling for further action of some kind,’ and the group may continue to talk up oil prices ahead of the 176th meeting in April as Russia Minister of Energy, Alexander Novak¸ endorses a price range of $55-65bbl.

Image of eia weekly field production of crude oil

Fresh updates from the U.S. Energy Information Administration (EIA) may bring OPEC and its allies a bit of relief despite the less-than-expected decline in oil inventories as weekly field production of crude holds steady at 11,700K for the third consecutive week. In turn, the current environment may encourage a larger correction in crude oil as non-OPEC output remains stagnant, and the rebound in energy prices appear to be fueling the near-term shift in retail interest as net-long interest continues to get washed out.

Image of IG client sentiment for crude oil

The IG Client Sentiment Report shows67.7% of traders are still net-long crude compared to 83.1% during the last week of December, with the ratio of traders long to short at 2.09 to 1. Keep in mind, traders have been net-long since October 11 when oil traded near the $71.00 mark even though price remains 28.2% lower since then.The number of traders net-long is 9.9% lower than yesterday and 27.4% lower from last week, while the number of traders net-short is 17.1% higher than yesterday and 149.8% higher from last week.

The decline in net-long position points to profit-taking behavior in light of the recent rebound, but the sharp accumulation in short-interest warns of a broader shift in market behavior even though oil prices have broken out of the downward trend carried over from late-2018. At the same time, recent developments in the Relative Strength Index (RSI) instill a constructive outlook for crude as the oscillator bounces back from oversold territory and carves a bullish formation. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

Oil Daily Chart

Image of crude oil daily chart
  • Keep in mind, the broader outlook for crude remains bearish as it snaps the upward trend from earlier this year, but the failed attempts to test the June 2017-low ($42.05) may pave the way for a larger correction as it snaps the downward trend from October.
  • The close above the Fibonacci overlap around $51.40 (50% retracement) to $52.10 (50% expansion) brings the $55.10 (61.8% expansion) to $55.60 (61.8% retracement) region on the radar, with the next area of interest coming in around $57.40 (61.8% retracement).

For more in-depth analysis, check out the 1Q 2019 Forecast for Oil

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.