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Crude Oil Price Forecast: Seven-Week Lows on USD Strength & Supply

Crude Oil Price Forecast: Seven-Week Lows on USD Strength & Supply

2016-11-11 20:55:00
Tyler Yell, CMT, Currency Strategist
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Talking Points:

  • Crude Oil Technical Strategy: Slipping Below 200-DMA at $43.80 & Ichimoku Cloud
  • Commodity Sector Feels Pain of USD Strength On Broad Energy & Metals Slump
  • Baker Hughes Rig Count Rises by 2 to 452 As OPEC Output Also Gains

The price of Oil broke the post-election lows on Friday and moved further below the 200-DMA. The price pivots and eventual trends that have developed off the 200-DMA make the next few days of trading increasingly important as a further breakdown could favor the view we shared that the move higher in October was a double-top that may revert to the long-term channel mean of ~$35/bbl.

Interested In a Quick Guide about OPEC, Click Here

As the price of Brent & Crude Oil settled below the 200-DMA on Friday (settlement is determined by average price over last hour of trade), traders continue to look at the increasing number of variables to consider. The seven-week low in price came on further USD strength and news of increased output by OPEC members. The formal negotiations for the deal have been rumored to be moved up to Nov. 28, but the outcome that results in an across the board production cut continues to be in doubt. All of these variables around founded on Wednesday’s data from the EIA showing the largest gain in U.S. crude output week-on-week since May 2015, which was followed by the IEA releasing another warning of pressure on the price of Oil due to, “relentless supply growth.”

D1Crude Oil Price Chart: Breakdown Below 200-DMA Turns Focus To Double-Top

Crude Oil Price Forecast: Seven-Week Lows on USD Strength & Supply

Chart Created by Tyler Yell, CMT Courtesy of TradingView

The chart above displays the multi-week ~17% price drop in Crude as doubts grow about whether or not OPEC would reach an agreement to cut production on November 28. The move lower has extended past the base of the Ichimoku Cloud and the 200-DMA ($43.80/bbl). The bearish view now becomes increasingly comfortable and could soon become the default view if the price remains below both of these indicators.

One discussion we’ve held off with the price above the 200-DMA and the Cloud was the possibility of a double top at $51/bbl. Given the three-wave move higher toward the $51.91 level in October, we will anticipate an impulsive decline, which could take us aggressively lower toward the August low of $39/bbl and possibly much lower. Given the weekly close below the 200-DMA, we may see hedge fund positioning shifting toward a Bearish posture, which would put the wind at the back of the Bears.

One component that had not shown up as the price of Oil traded toward the 200-DMA is a strong US Dollar. After the election of Donald Trump, we have had a very strong move higher in the DXY, and we should be on the watch for continued Dollar strength that tends to align with Oil weakness like we saw in H2 2014.

While the recent bearish move in Oil has been on reliant on the breakdown in OPEC negotiations, a resumption of USD strength that we saw in late October could keep price pressured near the 200-DMA until more clarity is gained.

Key Levels Over the Next 48-hrs of Trading as of Friday, November 11, 2016

Crude Oil Price Forecast: Seven-Week Lows on USD Strength & Supply

T.Y.

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