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Talking Points:
- Crude Oil Technical Strategy: Oil August Low Holds As Resistance, Focus Below $30
- Intermarket Analysis Turns Focus of Price Pressure On US Dollar Strength
- WTI printed at 12-yr low of $29.31/bbl yesterday and shows no signs of abating
Oil seems to be leading world markets. The leadership role became evident on Wednesday afternoon when Crude Oil closed at its lowest level in 12-years, supposedly squeezing out a fund from the market causing a forced liquidation that brought about panic selling in equities. Now, we’ve seen a 20-day correlation of SPX500 & WTI Crude Oil of 0.43 with even stronger correlations on other risk revealing markets like the UST 2Yr Yield.
This comes on the back of consistent concerns of the health of China’s economy and Oil producers pumping not due to market demand, but because they need to balance the books. At the close of business on Thursday, JPMorgan’s CFO noted that if price remained around $30bbl for 18 months, they would need to set aside ~$750M to cover losses. This can help give you a sense of the pain to be felt should this bear market persist which it easily could. One reason the pain may persist is that the Oil Boom was financed, and those creditors still have claims, which means either Oil will continue to be produced in order to pay creditors regardless of demand. It seems now that the only thing that could stop production is if we run out of storage capacity, which will need demand to pick up to make room available. Currently, Hedge funds are positioning themselves to brace for more losses as they hold their largest net-short bet across raw materials in 10 years.
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Today’s low was the lowest price since 2003. While the price may move marginally higher from here, the YTD high of $38.36 will be resistance with many sell-side desks on Wall Street looking at the mid-upper $20/barrel range as the more probable next level. Without a change in the fundamentals and a continued bid in the US Dollar that is taking the US Dollar Index to its own 12-year highs, Crude oil prices will likely remain low longer. As you can see on the chart below, the zone around the August 24 low of $37.73 up to the YTD intraday high of $38.36 is resistance, and until price closes above that level, the downside remains favored as the macro picture favors further selling. A close above that level would open up the ~$50bbl zone, which is nearly an 80% return from current levels. An additional technical note, you can see that the time it took us to go from the Nadir in 1998 to the peak in 2008 has aligned on the post-top with a few key Fibonacci Time-Zone Levels and another is coming up, which is the .786 multiple of the 1998-2008 time span. While the downside target is currently ~28.50, if we can reverse from here, we could see an attempt on the YTD high or higher, but in trading as in life, patience is a virtue whereas trading on indignation of past moves shows weakness.
As noted earlier, in a strong downtrend as we’re in now, support is made to be broken and that’s likely just what will continue to happen. The warning that oil may continue to fall even lower as inventories swell remains appropriate and China pushes up the US Dollar by weakening the Yuan aligns with our Speculative Sentiment Index or SSI. Our internal readings of Oil are showing an SSI reading of +2.319. We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are bullish provides a signal that US Oil may continue lower.
T.Y.
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