Yesterday was a significant one for oil from many different perspectives, with all the signals confirming the bearish tone for the commodity at present, and adding further downwards pressure in the short term. If we start with the technical picture, the September WTI contract closed with a wide spread down candle on the daily chart, ending the day at $95.58 per barrel and breaking through two key price levels. First, the recent phase of price congestion denoted with the pivot lows and pivot highs, which had seen the commodity trade between $98.20 to the upside and $96.50 to the downside, was finally breached with yesterday’s breakout. Second, and perhaps of even more significance, yesterday’s close, was well below the potential support region at $96.50 (as shown with the blue dotted line) which now becomes resistance. Third and last, yesterday’s price action was accompanied by high volume at 350,000 contracts, validating the move lower, and building a pattern of rising volume in a falling market, a strong signal of further bearish momentum to come.
Moving to the weekly chart, this reflects a similar picture, and should the potential support platform in the $94.80 per barrel area fail to hold, then oil is likely to fall further, possibly to test the $88 per barrel region last seen in early 2014.
The fundamental and global picture is also adding its own pressures to the commodity with an increase in supply from Saudi Arabia. In addition, Libya is also on stream despite their internal problems, and coupled with a recent IEA report that stockpiles of oil are building, as demand falls on a weak economic outlook, the supply/demand equation is adding to the bearish technical picture. Oil demand is also falling in Europe and the US, and with the German economy apparently contracting, and the driving season failing to lift demand, the overall picture is of further weakness to come. This week’s oil inventory release also reported a build in inventories to +1.4m bbls, reversing the recent trend of a draw and indeed surprising the market which had been forecasting a draw of -0.8mbbls.
Finally, as always the breakeven price for oil adds its own pressure to oil producers, with any move towards the $80’s per barrel area, likely to tip the Russian economy into recession. In the short term, the outlook for oil prices remains bearish, until the trip wire is triggered, and as always will be signalled by an analysis of volume and price!
By Anna Coulling