As we come to the end of another trading year, very few traders would have believed oil would be center stage along with the US dollar, and as the star of the currency of first reserve continues to shine brightly, that of oil continues to flicker and fade as OPEC maintains its policy of taking on the alternative energy providers head on. All of this is clearly reflected on the daily chart and in particular the February contract for WTI, where we have a repetitive price pattern of a fall, followed by consolidation with the downwards momentum then increasing once again as the next move develops.
The initial weakness for oil was first signaled early in October, following the extended phase of price congestion which saw the commodity move between $89 per barrel to the downside and $94.50 per barrel to the upside, while building the deep levels of price resistance and support denoted with the blue and red dotted lines. The commodity finally broke lower on rising volume with heavy selling pressure clearly evident, before entering a consolidation phase for the remainder of the month defined with the isolated pivot high and pivot low signals. Early in November, this phase of price action duly came to a close with the commodity falling on rising volumes once again and confirming the weak technical picture, before entering a further phase of consolidation.
The price action of the 28th November then delivered the ‘coup de grace’ for oil, as OPEC ministers confirmed there would be no cut in supply, sending the price of oil plunging on ultra high volume, and confirming the heavily bearish picture once again. December’s price action simply confirmed this overwhelming selling pressure, with a classical price waterfall developing on high and rising volume, and confirming once more this was indeed a genuine move lower. Finally, as we approach the end of December, oil prices have again entered a consolidation phase with the floor and ceiling clearly defined with the pivot low of the 16th December, and the subsequent pivot high of the 17th December, and with the resistance level now at $58.50 per barrel and the support region at $54 per barrel. However, this floor of support is now looking increasingly weak, and should the commodity breach this level (as we expect), then a move through the psychological $50 per barrel level becomes increasingly likely, and probably sooner rather than later, as the next downwards leg develops.
Perhaps more importantly with no significant regions of price congestion to support the current price level, there is a very real danger of a possible move to test the $39.44 per barrel low of early 2009. Whether this is tested only time will tell, but with the current fragile technical picture and with OPEC pulling the strings, anything is possible. What is perhaps more likely is that a floor will be reached in the mid 40’s per barrel area where some potential support awaits. Much will depend on the increasing clamor from the weaker members of OPEC will prevail and supplies will be cut in an effort to help drive the price of oil upwards once again.
As always, it will be volume that will signal any price floor, but until we see a buying climax on the longer term charts, then this will not be a happy new year for crude oil.