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WTI Crude Oil Price Forecast: Momentum Pushes US Oil To New 6-Yr Lows

WTI Crude Oil Price Forecast: Momentum Pushes US Oil To New 6-Yr Lows

Tyler Yell, CMT, Currency Strategist


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Talking Points:

WTI Crude Oil price spilled to new 6-year lows on Thursday. What’s worrying for the near-term hope of a reversal is that this last leg has happened at a time of a seasonally weak US Dollar. Given the OPEC decision to lift their output target, which pushed the price of Oil below the August 24 low, a resumption of US Dollar strength could turn our attention below the December 2008 low of $32.40. While we asserted earlier that the most likely component that could take Oil higher without renewed demand would be a sell-off in the US Dollar were the Fed to disappoint USD Bulls on December 16 that is still a lower probability event. Because the US Dollar is inversely correlated to the price of US Oil, a resumption of US Dollar strength would presumably send US Oil (and other dollar-denominated assets) a good deal lower toward 2009/2008 lows.

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For now, Monday’s high will remain resistance at $40.11bbl. There was a large level of confluence at the $40 handle that included the August 24 high, Fibonacci equal wave lower, and early November support to name a few. If price breaks above $40.11, We will reconsider the bias lower. For now, we’ll be able to lean upon the two price channels that both favor a focus on $34/$35 zones unless the environment changes. Now, the price is sitting on top of the highlighted Fibonacci confluence zone between $36.55-$34.85. If price breaks lower from there, we would likely turn our focus toward the price extremes mentioned above.

Oil is never an easy market to forecast/ analyze, but what makes it trickier this time around is the extreme sentiment. Of course, we had the previously mentioned OPEC decision to keep pumping and the strong Dollar putting pressure on the price of Oil, but the hero to the Oil bear story behind the curtains are the speculators. As per the records of the CFTC, NYMEX Oil short contracts are sitting near record levels, and there is far more exposure to the short side than there was in 2009 when we printed $32.40 on December 19. Without an unwind from the massive short position, and potentially more joining in on the momentum play of the year, we could continue to see new multi-year lows print for US Oil. From a sentiment perspective, our internal readings are showing an SSI reading of +2.97.We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are long gives a signal that the US Oil may continue lower.This trend lower in US Oil will remain in place as price trades below resistance of Monday’s high at $40.11, a level that acted as support before this week’s ~5% decline.


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