- Crude Oil Technical Strategy: Oil Rebounding to Key Resistance Zone
- The Offered US Dollar Further Puts Support Under Oil’s Advance
- WTI Is Starting To Divorce from Leading Risk Sentiment, Which May Support US Oil Bulls
Have We Found Our Floor?
Oil has continued to fall further and more doubt that a sustainable move higher is on the way. Yesterday, the sell-off took on new life when a realization about the consistent crude oil inventory build in Cushing, OK is a mere 8M bbls from being at theoretical max capacity. Specifically, a Reuters report showed the following note from the EIA.
U.S. Energy Information Administration data on Wednesday showed inventories at the Cushing, Oklahoma delivery hub hit a record 64.7 million barrels last week - just 8 million barrels shy of its theoretical limit - stoking concerns that tanks may overflow in coming weeks.
Below, you will see that prices have hit their lowest levels since 2003, and now concerns are developing that a move down to ~$22 could be on the way soon. In addition, you will note that resistance at $34.79 and $38.36 the YTD high remain in focus as a sign that true buyers are stepping in to buy Oil. Below these key levels, worries may persist about supply, which is in line with our 2016 fundamental outlook on Oil.
Long-Term Oil Support Unlinkely Until $22
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Intermarket Analysis Shows Market Confusion, Maybe CapitulationThe US Dollar was seen as a driver for the move lower in Oil. Now, the dollar strength / Oil weakness argument is not as strong as it was as the US Dollar is selling off, yet Oil is falling further still without a sustainable bid, except for the one found on short-term rumors around a production cut. Either way, more than rumors will be needed for a market bottom to form. However, do not expect volatility to slow down.
On Thursday, the CBOE Crude Oil Volatility Index or Oil VIX showed expectations for large price swings were at their widest in 7 years. Equally impressive was the trading volume showing that open interest was increasing and trading volumes in aggregate were highest on record. Such a combination is likely responsible for Friday’s wild swings ahead of a long weekend in the United States.
Key Levels from Here
For now, the key price resistance a zone of confluence around the 38.2% of the February range at 28.91 up to the $30.60 level. If the price can close above that zone, the focus will turn to the 50-day moving average and late January high and for Oil at $33.32 and $34.79 respectively. Short-term trend support will be on Friday morning’s higher low near $27. An ability for the price of Oil to hold above this level could continue to support enthusiasm for Oil bulls.
It is worth noting that bear markets have some of the most aggressive rallies that can put short sellers on the sideline until a new narrative takes over the market or the outlook darkens. Friday’s ~12.5% rally off Thursday’s low appears to have taken the appetite for new lows out of the market for now. However, it’s important to be aware of the increasing narrative of worrying stories from the global economy that continue to favor demand remaining low or dropping further relative to supply, which could kick off the next leg lower in Crude. .
Sentiment Flip Warns of Further Short-Term Upside
In addition to the technical pressure, that Oil may have found a short-term support zone around the Thursday’s 12.5yr price low, the larger bearish view aligns with our Speculative Sentiment Index or SSI. Our internal readings of Oil are showing an SSI reading of 3.3375. We use our SSI as a contrarian indicator to price action, and the fact that the majority of traders are now bullish provides a contrarian signal that US Oil may continue eventually lower. If the reading were to turn negative again, and the price broke back above $34.79bbl, we could begin looking for a retest of the YTD high of $38.36.
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