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Will Oil Bears Take Crude Below $35?

By Investing.com (Barani Krishnan/Investing.com)CommoditiesSep 09, 2020 07:10AM ET
www.investing.com/analysis/will-oil-bears-take-crude-beneath-35-200536862
Will Oil Bears Take Crude Below $35?
By Investing.com (Barani Krishnan/Investing.com)   |  Sep 09, 2020 07:10AM ET
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Even the oil bears may have been surprised by the crash in crude prices yesterday. The fall, when it finally arrived, was at such a velocity that investors who tried, unsuccessfully, to short the market since the oil price recovery in May, were probably a little dumbfounded. 

Investors with a conservative view of oil, amid the worst pandemic in history and a jet fuel market that remains in shambles, might have found crude more acceptable at $35-$40 per barrel rather than $40 to $45. 

The behavior of the oil market over the last four months has been clouded by euphoria rather than convincing statistics on the impact of business reopenings after the COVID-19 lockdowns of March this year.

WTI Daily
WTI Daily

The picture was further distorted by the draw of 38 million barrels of crude over a six-week stretch by U.S. refiners who appeared to be running at full summer steam and were not acknowledging that the restrictions from the pandemic were significantly altering consumers' behavior.

Tepid U.S. jobs recovery since July — despite unemployment returning to single digit — and a resurgent dollar, added to commodities' woes and capped crude in the low $40s. 

The wheels finally came off the market last week when OPEC kingpin, Saudi Arabia cut the selling price of its oil, ostensibly to preserve or widen its market share. The Saudi move came weeks after OPEC’s global producer alliance called OPEC+ said it was reducing production cuts observed since May. 

Those ominous actions were followed by U.S. refiners slashing their crude utilization by 5% in just a week, as the peak summer driving season drew to a close. The return of the Dollar Index to its bullish 93-handle and the stocks rout on Wall Street completed a perfect storm for crude longs.

The question though is has the selloff been exhausted? And if not, how low could it go? 

In Wednesday’s Asian trading, U.S. crude’s West Texas Intermediate benchmark clung to the 12-week low of $36.13 it hit in the previous session. With analysts expecting both industry and government data over the next two days to show another million barrels in crude draws for last week, WTI may indeed be on the cusp of a rebound. 

But crude chartist James Hyerczyk said in a post on FXEmpire that WTI’s main range was wide, at between $23.26 and $43.78. 

WTI’s Primary Downside Target: $31.10 

Tuesday’s take out of the main bottoms of $39 and $37.56 triggered stop losses that helped accelerate the downside pressure. If the downside momentum looked to test the June 12 bottom of $35.25, it will be followed by a potential breach of the May 28 bottom of $32.66, Hyerczyk wrote.

He adds:

“The main range is $23.26 to $43.78. Its retracement zone at $33.52 to $31.10 is the primary downside target and value area. It represents 50% to 61.8% of the entire April to August rally so a pullback into this area would offer a great opportunity for new buyers to enter the market in anticipation of an eventual recovery in the global economy.”

But if WTI does better, it could hold on to its short-term range of $32.66 to $43.78. 

Hyerczyk noted that on Tuesday, the market straddled its retracement zone at $38.22 to $36.91. “Trader reaction to this zone should determine the next short-term move.”

WTI’s 'Candles Diminishing', More Downside Could Come

Rajan Dhall, another technical tracker for crude, said WTI’s actions certainly suggested more downside to come. Dahll wrote in a post on FX Street:

“Since the break of the 55 Simple Moving Average there has been a strong move lower past USD 40 per barrel to reach a low of USD 36.43 per barrel. The candles had been diminishing in size leading into the sell-off which suggests the bull run was running out of steam. Having said that, the lacklustre price action lasted longer than some had expected.”

Dhall added that U.S. crude’s Relative Strength Index was extended in the oversold area and the Moving Average Convergence Divergence histogram was in the red, with signal lines crossed under the mid-level. 

“The main focus will now be if the price can stop at the 38.2% Fibonacci level which confluences with an old resistance zone from April,” he wrote. “The level has been used a few times other than that so it could be significant in the future as the price plummets.”

Brent In Contango, Suggesting Oversupply Might Return

Analysts at Bloomberg noted that the three-month time spread for London-traded Brent crude was nearing the widest contango—a situation where the futures price would be above the expected future spot price.

That was an indication that oversupply fears might return to haunt the market, according to Bloomberg. 

Brent lost 5.6% last week and settled Tuesday’s session down $2.23, or 5.3%, at $39.78, after a session low at $39.31. In Wednesday’s Asian trading, it hovered at $39.70.

Rating agency Fitch, meanwhile, raised its 2020 forecast for Brent, while lowering projections for 2020 for the global crude benchmark. 

Fitch said it foresees Brent averaging $41 per barrel in 2020, up from its June forecast of $35 per barrel. It revised the 2022 price forecast lower to $50 from a previous $53.

 

Will Oil Bears Take Crude Below $35?
 

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Will Oil Bears Take Crude Below $35?

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Comments (8)
Isaac Ramazanii
Isaac Ramazanii Sep 10, 2020 2:57AM ET
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I trust the GOLD trade
Robert Flores
Robert Flores Sep 10, 2020 12:50AM ET
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When it does spike down to 35, and it will! Bears better get out and take profits, because i believe it will reverse and break out into the high 40s to low 50s and will keep going up with so many rigs offline
Mahdi Kerrar
Mahdi Kerrar Sep 09, 2020 10:32AM ET
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These articles say two opposite views every single day..
Barani Krishnan
Barani Krishnan Sep 09, 2020 10:32AM ET
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Mahdi Kerrar, the objective is to present as much of the variables/fundamentals/background as possible in a concise digestible format, so that the reader can make an informed decision. Simply, my job is to tell you what could happen out there on both ends of the spectrum, and you lean the way you think is right. Unsurprisingly, there are contrarian views within the same article. That's why even the headline is a question, rather than a statement.
ananda jabli
Anandha Sep 09, 2020 10:09AM ET
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After Crude went negative in April 20,only an upside was seen with no visible correction and got stuck at $40 to $42 range for quite long,seeing no distinct  movement in prices most days,giving a sense to the bulls that betting higher above was not possible and a much needed correction was the way to go.
inderjeet virk
inderjeet virk Sep 09, 2020 9:38AM ET
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lower oil production is offsetting the lower demand and we are at deep maintenance  season which might not help to present a clear picture of inventories.
Llewellyn Kruger
Llewellyn Kruger Sep 09, 2020 7:32AM ET
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Great summary. Thanks.
Camaro Camero
Camaro Sep 09, 2020 6:32AM ET
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We have to get demand up or it will continue to lag. I am long on Big Oil and have time to wait. VERY good time to invest, there will be some massive gains first quarter 2021.
Florin Manzar
Florin Manzar Sep 09, 2020 4:40AM ET
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No... lowering demand will
 
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