Crude drops for third day

Crude oil prices have bounced off their worst levels amid profit-taking after falling for the third consecutive day. Oil prices have given back a significant chunk of their gains made over the past couple of weeks, when sentiment was lifted by sharp falls in crude stocks at Cushing and amid good compliance with the production cuts by OPEC and non-OPEC countries. Although destocking in Cushing has continued, with stocks there falling below 30 million barrels for the first time since late 2014, the overall increase in U.S. oil stocks has overshadowed the good news.

Given the firmer prices and rising crude production levels, if growth in demand does not keep up, crude inventories are likely to rise again. What’s more, the OPEC will not be able to keep its production agreement with other non-OPEC members for too long should the U.S. continue to win more market share. Buck-denominated oil prices are coming under additional pressure because of the ongoing dollar recovery and stock market sell-off (which is weighing on risk-sensitive assets) amid rising expectations over aggressive interest rate rises.

Consequently, WTI’s technical outlook doesn’t look too great at the moment. Its inability to hold above the 2015 high of $62.55 per barrel last month was clearly a bearish development as it subsequently fell sharply. More recently, since mid-February, oil tried once again to reclaim that $62.55 level and although it achieved a high of $64.20 at the start of this week, it couldn’t hold there. This clearly indicates that the rally has lost steam and that prices may have to fall further in order to stimulate fresh buying interest. However, the recent low of $58.10 hasn’t been breached yet. So, the technical outlook is not exactly doom and gloom although it doesn’t look too bright either.

Today, WTI has found some support around the old support and resistance levels in the $60.00-$60.50 range. The upper end of this range also corresponds with the high of 2017, while the lower end marks the opening price level for this year. Thus, in the event WTI breaks below this $60.00-$60.50 pivotal area then this would clearly be a bearish development. In this potential scenario, WTI’s next bearish objective would be the resting liquidity below the most recent swing low at $58.10. And if there’s acceptance below $58.10 – assuming of course price will get there in the first place – then this would reinforce the bearish trend.

Now if the trend is bearish, where would the bearish speculators be proven wrong? I think a break back above $64 would be significant. So, the buyers may regain control if WTI were to climb back above $64, or if we see a significant reversal price pattern form at lower levels first. The next potential support below the levels mentioned above could be around the 200-day average at $53.50 area. Meanwhile $55.50 is an interesting level too for it corresponds with the point D of an AB=CD price projection.

About the Author

Fawad Razaqzada is market analyst at and City Index brands of Gain Capital.