Oil Trading Alert originally sent to subscribers on January 7, 2015, 10:27 AM.
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.
On Tuesday, crude oil lost 3.88% as expectations of growing supplies and concerns over the pace of global growth weighed on the price. In this way, light crude dropped to its lowest level since Apr 2009, slipping well below $50 per barrel. What’s next?
On Monday, Saudi Arabia, lowered the price of its benchmark light oil in the U.S. once again, which pushed the commodity to a fresh low of $49.68. This move continued to weigh on the price also yesterday, rising worries that kingdom may be trying to regain market share and push crude oil low enough that U.S. shale-oil production becomes unprofitable. Additionally, declines accelerated ahead of weekly U.S. inventory data, which are expected to show that crude-oil supplies grew last week. In this environment, light crude extended losses and slipped below $48 per barrel. How low could the commodity go? (charts courtesy of http://stockcharts.com).
Quoting our previous Oil Trading Alert:
(…) light crude dropped not only to a fresh multi-year low of $52.03, but also closed the day under the lower border of the consolidation. This is a bearish signal that suggests further deterioration in the coming day(s). If this is the case, the initial downside target for oil bears will be the lower border of the support zone marked on the weekly chart (the 78.6% Fibonacci retracement at $51). However, taking into account the above, it seems that light crude could go even lower and test the next psychological barrier of $50 per barrel in the coming week.
Looking at the charts, we see that oil bears not only took the commodity to the above-mentioned target area (as we expected), but also managed to push crude oil to the next support zone created by the Apr 2009 lows. Will we see further deterioration? As you see on the daily chart, the recent declines materialized on rising volume, which confirms oil bears’ strength. Taking this fact into account, we think that another attempt to move lower and test of the strength of the lower border of the support zone marked on the weekly chart (at $46.72) is likely. In our opinion, this scenario will be even more likely if today’s the EIA weekly report shows another increase in crude oil inventories (analysts expect the report to show that domestic oil supplies rose by 880,000 barrels). Nevertheless, we should keep in mind that a smaller-than-expected increase or a decline will support the price and trigger a corrective upswing. In this case, the initial upside target would be the previously-broken level of $50.
Summing up, crude oil dropped below the psychological barrier of $50 and reached the support zone created by the Apr 2009 lows. Taking into account rising volume during the recent decline, we think that another attempt to move lower and test of the support level at $46.72 is likely. Nevertheless, as long as there is no breakdown below this support level, lower values of the commodity are not likely to be seen.
Very short-term outlook: mixed
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bullish
Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective at the moment. However, if we see an invalidation of the breakdown below the level of $50, we’ll consider opening long positions. We will keep you informed should anything change.
Thank you.
Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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