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Oil Price Talking Points

The price of oil extends the rebound from the monthly-low ($50.52) as the US delays a portion of the next tranche of China tariffs to December 15, and recent price action raises the risk for a larger correction as crude extends the series of higher highs and lows from earlier this week.

Crude Oil Prices Eye Monthly-High as US Delays China Tariffs

Crude prices may continue to catch a bid as China pledge to hold talks with US representatives in two weeks, and fresh details of an imminent trade agreement should keep oil afloat as it instills an improved outlook for consumption.

It remains to be seen if a resolution will be reached ahead of the new deadline as the People’s Bank of China (PBOC) weakens the Yuan reference rate, and Chinese officials may take additional steps to insulate the economy as the 2Q Gross Domestic Product (GDP) report shows the growth rate slipping to a fresh record low of 6.2%.

At the same time, the US may continue to adjust its trade policy as President Donald Trump tweets that “the tens of billions of dollars that the U.S. is receiving is a gift from China,” and little indications of a looming trade deal may continue to drag on oil prices amid the weakening outlook for global growth.

In turn, the Organization of the Petroleum Exporting Countries (OPEC) and its allies may take additional steps to balance the energy market, and the group may curb production throughout 2019 in response to the pickup in US output.

Image of EIA US weekly field production of crude oil

The latest update from the US Energy Information Administration (EIA) showed crude inventories unexpectedly increasing for the first time in eight weeks, with stockpiles climbing 2385K in the week ending August 2, while oil production increased to 12,300K from 12,200K during the same period.

The rise in US crude output may become a growing concern for OPEC and its allies, but the group appears to be in no rush to announce additional measures to balance the energy market as the most recent Monthly Oil Market Report (MOMR) states that “in 2019, the global oil demand growth forecast remains at 1.14mb/d, with expectations for global oil demand to reach 99.87 mb/d.”

With that said, OPEC and its allies may stick to the status quo ahead of the next meeting on December 5, but the lack of response may continue to drag on crude prices amid the lingering threat of a US-China trade war.

As a result, oil prices remain at risk of facing a bear market especially as a ‘death-cross’ formation takes shape in July.

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Crude Oil Daily Chart

Image of oil daily chart
  • Keep in mind, the broader outlook for crude oil is no longer constructive as both price and the Relative Strength Index (RSI) snap the bullish trends from earlier this year.
  • At the same time, a ‘death cross’ formation has taken shape in July as the 50-Day SMA ($55.97) crosses below the 200-Day SMA ($56.53), with both moving averages tracking a negative slope.
  • However, the price of oil appears to be making a run at the August-high ($57.99) following the failed attempt to test the Fibonacci overlap around $48.80 (38.2% expansion) to $49.80 (78.6% retracement), with a break of the monthly opening range raising the risk for a move towards $59.00 (61.8% retracement) to $59.70 (50% retracement).
  • Nevertheless, failure to test the August-high ($57.99) may bring the downside targets back on the radar as the RSI continues to track the bearish formation from earlier this year, with the first area of interest coming in around $54.90 (61.8% expansion) to $55.60 (61.8% retracement) followed by the $51.40 (50% retracement) to $51.80 (50% expansion) region.

For more in-depth analysis, check out the 3Q 2019 Forecast for Oil

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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.