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Crude Oil Outlook Mired by Stimulus Deal as Libya Lifts Supply

Crude Oil Outlook Mired by Stimulus Deal as Libya Lifts Supply

2020-10-12 18:30:00
Rich Dvorak, Analyst
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OIL PRICE OUTLOOK: CRUDE OIL THREATENED BY FAILED STIMULUS TALKS AMID RISING OIL PRODUCTION PROSPECTS

  • Crude oil prices dropped about 3% during Monday trade as commodities recoil lower
  • Bearish headlines pointing to higher global oil supply likely explain the downward move
  • Oil volatility looks largely fueled by market sentiment surrounding fiscal stimulus talks
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Oil price action has succumbed to renewed selling pressure over the last two trading sessions. Crude oil now fluctuates back below the $40.00-price level after today’s near 3% decline extended Friday’s 1.4% slide. Recent weakness underpinning crude oil prices seemingly corresponds with bearish headwinds that stem from easing supply blocks in Norway and Libya, which opens up the door to potential for a material rise in global oil production.

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CRUDE OIL PRICE CHART: DAILY TIME FRAME (27 MAY TO 12 OCT 2020)

Crude Oil Price Chart Forecast Technical Analysis

Chart created by @RichDvorakFX with TradingView

This threatens to undermine crude oil supply-demand imbalances as global oil demand stagnates and supply from major oil producers comes back online. Meanwhile, recent crude oil price action hints at the possibility of further downside following the latest rejection of its 50-day simple moving average. The relative strength index seems to be pointing lower again as well.

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September and month-to-date swing lows around the $36.75-price zone stands out as a potential area of defense that might stymie crude oil selling pressure. Also, in light of the ongoing Bollinger Bandsqueeze, crude oil prices could stay relatively afloat and continue to oscillate between these barriers of technical support and resistance as the commodity broadly drifts sideways.

CRUDE OIL PRICE CHART: 4-HOUR TIME FRAME (27 MAY TO 12 OCT 2020)

Crude Oil Price Chart Volatility

Chart created by @RichDvorakFX with TradingView

That said, the price of crude oil appears to hinge largely on swings in market sentiment driven by stimulus deal headlines. More coronavirus aid from fiscal authorities stands to increase economic activity and crude oil demand in turn. Correspondingly, another comprehensive fiscal stimulus package, if reached, looks to boost both future inflation expectations and the price of crude oil.

Oil - US Crude BEARISH
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Change in Longs Shorts OI
Daily 42% -30% 1%
Weekly 30% -33% -6%
What does it mean for price action?
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Nevertheless, while US politicians struggle to break the impasse over fiscal stimulus negotiations, however, risk assets like crude oil and major equity indices hang in jeopardy. This bearish scenario warrants increased consideration seeing that Republicans and Democrats might opt to ‘kick-the-can’ by delaying a compromise on coronavirus aid until after the November election. As such, with crude oil outlook clouded by US election and fiscal stimulus uncertainty, the underlying trend of expected oil price volatility could serve as a bellwether to where the commodity heads next.

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Generally speaking, an inverse relationship is often maintained by risk assets and measures of implied market volatility. Another breakdown in stimulus talks has potential to catalyze a material deterioration in trader sentiment and rise in market volatility, which could cause crude oil prices to gravitate lower. On the other hand, if expected oil price volatility pulls back amid unwavering investor risk appetite, or if a bullish market response is sparked by a fiscal stimulus breakthrough, the commodity might regain lost ground and jump toward August swing highs.

-- Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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