WTI Crude Oil Price Forecast: Pulling a Trade from the Brent/ WTI Oil Spread
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Talking Points:
-Crude Oil Technical Strategy: Oil Finds Short-Term Support at Key Support
-Temporary USD Weakness Allows US Oil Downward Pressure to Subside
-RSI Wedge Could Precede Momentum Breakout
The pressure in Oil seems to be unrelenting. On Friday, the market got wind of the Baker Hughes rig count that jumped by 17 (meaning more production in an oversupplied market), and prices dropped yet again. The trend is definitively lower, but traders without exposure in the market may want to keep an eye on a few signs that a short-term bottom could be forming, at least for US Oil. While we often discuss the US benchmark for Oil, West Texas Intermediate Crude, the international benchmark for Oil recently broke below its 2008 low. The December 2008 low for Brent Oil was $36.20, and this week’s low was $36.05, $0.15 below the 2008 low.
A dynamic worth focusing on is that pressure could build on Brent that isn’t seen in WTI or US Oil. The reason for that is many, but one of the most interesting reasons is one-sided exposure. What has developed is that traders have shorted WTI US Oil to an extreme such that there are few longs left in the market, as you can imagine, a reversal often happens when all the sellers have exhausted their downside exposure, but that could now move to the global counterpart of Brent or UK Oil. The long exposure on Brent Oil could further unwind, and push the spread between US Oil & UK Oil to parity such that the standard spread is brought down to zero. If there are more sellers to emerge on Brent or UK Oil, whereas the US Oil shorts are exhausted, there could be a rebalancing that brings US Oil higher, although not materially so for now.
Turning to the price of US Oil, you can see we have seemed to find a sticking point north of $33.50/bbl, the 2009 low. Just below there is the December 2008 low at $32.40. We will continue to focus on this price zone as support. However, there are other technical forces that may act as support for testing those levels.
First, you will notice that two key points are converging on two Andrew’s Pitchforks drawn off prior key pivots. The Red Pitchfork is drawn over a longer time-frame whereas the Black Pitchfork is more precise because the span of points is tighter and covers a smaller range. However, the median line of the shorter-term Pitchfork has aligned with, the lower parallel line of the longer term pitchfork at a point that additionally aligns with a Fibonacci 1.272% extension. This bounce off support is by no means enough to call a bottom in Oil, but rather a potential relieve rally back to the August 24th low & December 15th high of $37.73-$37.86/bbl. End of year seasonal tendencies favors US Dollar weakness, which may support Oil further.
Lastly, you can see RSI (5) pushing on trendline resistance. A break higher could further show a relief rally is underway. Momentum has stalled to the downside, even as price pushed further down, which can indicate some reversal on the horizon. If RSI(5) does unwind, and a move higher develops, it would be worth keeping an eye on the resistance levels of the December 15th high, and move our sights to the $40.00/bbl level where we recently accelerated lower on December 7th. A break of $40.00 on a closing basis would be the first decent signal of a more significant turn, which aligns with an Elliott Wave count we have been tracking, that could see us test upper $50s in Q1 2015.
