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Crude Oil Price Forecast: US Production Surge Has Spreads Favor Downside

Crude Oil Price Forecast: US Production Surge Has Spreads Favor Downside

Tyler Yell, CMT, Currency Strategist

Crude Oil Price Forecast Talking Points:

  • WTI Crude Oil Technical Analysis Strategy: Price sitting on support, break below $59.17 in focus
  • Demand relative to supply will have to keep up for Bull’s hope to remain alive
  • Trader Sentiment Highlight from IG UK: retail positioning is balanced at 50%, allowing for pivot

The rise in US production has been discounted because demand around the world, and specifically in China has swallowed much of the increased supply. However, the trajectory of supply looks fixed to increase, the trajectory of demand is more volatile.

Crude Oil Inventory Data Shows Rising Output and Inventories

Recently, data from the EIA showed a rise in US stockpiles after excessive declines through H2 2017. Typically, a rise in stockpiles wouldn’t offer too much concern except that US production rose to a record high.

Earlier this week, the EIA Drilling Productivity Report highlighted US shale production as likely to increase further in April to a record high 6.95mm bpd. This data will act as a cloud preventing further bullishness from taking over unless demand picks up mightily.

Another way of seeing this fear of supply pressures is through futures spreads, which help show if traders and hedgers in the physical market see Contango where the front dated contract trades at a premium or backwardation where the front-month contract trades at a premium and often supports a broader bullish view.

This week, the spread between April-May flipped from backwardation or a bullish bias to Contango or a bearish bias. It’s too early to see if this trend will continue, but Contango makes calling for a breakout in the front-month crude contract more difficult and brings preference to watching for a breakdown below technical support.

Crude Oil Price Sits On Technical Support Near $59.17

WTI Crude could be working on a bearish pattern as the price sits near pattern support. The bearish outlook, which is gaining favor would be invalidated on a close above resistance 63.14, the March 6 high. The pattern in focus is a series of lower highs into the 100-DMA at 60.52/bbl and Ichimoku Cloud support.

A break below the 100-DMA would likely turn focus to $57.32/58, which marks the 38.2% retracement of the June-January range and pivot in early February. Even on a price breakdown, should support hold near $56.11/bbl, the technical view would remain as a countertrend move.

Unlock our Q1 18 forecast to learn what will drive trends for Crude Oil at the open of 2018.

Crude Oil Chart: WTI Crude Price Sitting On Pattern Support As Fundamentals Weigh

Please add a description for the image.

Chart created by Tyler Yell, CMT. Tweet @ForexYell for comments, questions

WTI Crude Oil Insight from IG Client Positioning

Crude Oil Price Forecast: US Production Surge Has Spreads Favor Downside

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Oil - US Crude prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Oil - US Crude-bearish contrarian trading bias.

Bottom Line:

Physical market evidence is beginning to drown out the hope for Bulls, and if demand does not pick up as evidenced by falling stockpiles, the price will likely soon break below support levels in this strong trend.

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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Contact and discuss markets with Tyler on Twitter: @ForexYell

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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