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WTI Crude Oil Price Forecast: Oil Sees Big Bounce Higher off Big Fibo Level

WTI Crude Oil Price Forecast: Oil Sees Big Bounce Higher off Big Fibo Level

Tyler Yell, CMT, Currency Strategist


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Talking Points:

WTI Crude Oil opened the week lower after the Chinese Yuan devaluation continued to spook markets. However, Monday’s low of $34.51/bbl found channel support and Fibonacci support before breaking higher to close higher by nearly 2.5% on the day. Today, as WTI Crude Oil trades near 7-year lows off the December 4th OPEC meeting, the message appears to be, it’s every OPEC member for themselves. Unfortunately, for Oil bulls, this move from OPEC to abandon their output quota is to maximize output, which they successfully did in November, to push higher cost producers with weak balance sheets out of business. Oil continues to lack bullish arguments as supply remains flooded relative to demand, however because the US Dollar is inversely correlated to the price of US Oil, a reversal of US Dollar strength would presumably send US Oil back toward $50/bbl. Outside of that dynamic, the environment would favor a continued move toward 2009/2008 lows.

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The ~2.% rise on the day is enough for Oil bulls to feel good for now, but there are a few levels of resistance we should clear to see momentum carry Oil higher. For now, last Monday’s high will remain the focal resistance at $40.11bbl. There was a large level of confluence at the $40 handle that included the August 24th high, Fibonacci equal wave lower, and early November support to name a few. Between current price (spot: $36.24), and last Monday’s high is the August 24th low of $37.73. If price breaks above both levels above, we’ll reconsider the bias lower. Given the bounce off the 2015 channel (blue), it’s entirely possible a move higher is on the horizon. Should today’s low, near the key 1.618% hold, we would need to look for Intermarket confirmation that a move now may be on hand. US Dollar weaker would be the easiest thing to point to that could align with US Oil strength. However, if price breaks lower from here, we would likely turn our focus toward the price extremes mentioned above.

After OPEC had failed to cut production in November 2014, Oil fell for seven straight weeks taking out nearly 40% of its value. Should we see a similar development in Oil in late 2015, and into 2016, we could see a move to around $25/bbl, which OPEC would accept if it meant other non-OPEC producers were not able to survive this particular winter of the Oil market. We recently noted that 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 19th. This positioning means the Oil market is sitting on a tight-rope, but that doesn’t necessarily mean we’ll reverse, but rather when a reversal occurs, it could be more aggressive than many anticipate. From a sentiment perspective, our internal readings are showing an SSI reading of +2.4544.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 the August 24th low of $37.73/bbl.


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