Chart Of The Day: Oil Rally Stalls At Key Long-Term Juncture
Fawad Razaqzada | Jul 09, 2021 09:15
This article was written exclusively for Investing.com.
After the significant volatility over the past few days, are oil prices going for a deeper correction?
OPEC infighting hurt sentiment/h2
Crude oil prices slumped midweek, then bounced back on Thursday to trim their weekly losses. Prices initially rose then slumped after the lack of agreement on supply by OPEC+ raised concerns that the United Arab Emirates (UAE) may pursue its own interests.
The oil market was gripped by fears that the UAE is looking to sell as much oil as it can at these elevated prices, something which other members may also have to pursue so they don’t lose out. Adding to these concerns were fears over demand as the spread of the Delta variant of Covid-19 caused lockdowns, including in Tokyo. What’s more, there was undoubtedly a lot of hedging by oil companies, locking in prices at these elevated levels in case they crash at some later point in time.
But prices bounced back on Thursday amid signs US demand is roaring. Here, crude stockpiles dropped by 6.9 million barrels last week, well above expectations for a 4 million decline. Impressively, gasoline stocks dropped by 6.1 million, again much higher than 2.2 million barrel drop expected.
The key question is where we go from here/h2
Obviously, a lot depends on OPEC, but with no signs of a rescheduled meeting, the uncertainty is not going help sentiment much, even if it means the group will ease supply more slowly under the current agreement. If Saudi Arabia and the UAE put their differences aside, more supply will come to the market anyway. Meanwhile, the story of strong demand, which we are witnessing now, has surely been mostly priced in, if not fully. All told, the risks are skewed to the downside from here—especially after prices created tentative technical signs of a bearish reversal this week.
Both crude oil contracts reversed some of their losses on Thursday and were edging slightly higher at the time of writing on Friday. Brent created a hammer candle on the daily time frame on Thursday after bouncing off its bullish trend line to trim its weekly losses. But this could prove to be a false signal, after prices had reversed sharply in mid-week.
Keep a close eye on the lower time frames, with broken support in the $74.40 to $75.00 area which could potentially turn into resistance. If oil prices struggle to stay above Thursday’s bullish-looking candle, then this should give you a good indication that they want to head lower instead.
So, watch price action on the lower time frames if you are thinking to short oil on Friday. However, if there seems to be acceptance above Thursday’s hammer then you have to respect that and await further price action before potentially dipping your toes in on the short side.
On the other hand, if you are bullish and thinking to go long crude oil, you will certainly want to see some further bullish price action in light of what has happened this week—perhaps waiting for a potentially deeper correction might not be a bad idea.
Meanwhile the longer-term chart of Brent oil shows prices are in a key technical juncture:
The monthly chart is very important insofar as the long term is concerned as it hides the day-to-day or week-to-week volatility, providing good information about the macro trend. With that in mind, Brent oil has this week tested its central bearish trend that has been in place since 2008, and it fell back to turn flat, having started the month positively. Obviously, there is a long way to go before the month closes and a lot could change. If we get:
- A monthly negative close, especially below the pre-lockdown high of $71.75, this would paint a very bearish picture for it will point to a failed breakout attempt. This in turn could lead to further technical selling in the months ahead, pushing oil down to $60 or even significantly lower.
- A monthly close above the bearish trend line would be technically bullish as it would point to a breakout. In this case, we could see Brent oil go well north of $80, possibly reaching $90 or higher in subsequent months.
So, depending on your time frame and investing/trading style, I have laid out a couple of different scenarios. Overall, I feel there is increased risk for oil prices to stage a deeper correction despite Thursday’s bullish reversal.
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