Lock, Stock and the Price of the Oil Barrel

The selloff in the price of crude has gathered pace after Friday's report, but how much further can it go

Oil made fresh 6-year lows yesterday at levels not seen since March 2009, following speculation that records U.S. supply may start to strain the country’s storage capacity. The International Energy Agency predicted that oil storage tanks could fill up as drilling rigs fail to slow production and government data showing that US output and stockpiles have expanded to their highest level in over 30 years.

According to the Commodity Futures Trading Commission data, bullish speculators cut their position in WTI to their lowest level in over 2 years. Whilst positons on the short side increased last week to record levels. Former Federal Reserve Chairman Alan Greenspan, said in a recent Bloomberg TV interview that ‘the oil price hasn’t bottomed yet because tanks at the U.S. storage hub are reaching full capacity’ and experts say that weak demand, moderate economic growth and a strong dollar cannot keep pace with the current production levels which are continuing strongly. U.S. storage tanks are about 63 % full, according to Soc Gen’s oil market research team, around 448.9 million barrels which is the highest level in weekly records dating back to August 1982.

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Despite a cut in the number of rigs, with companies ceasing around 710 rigs (a reduction of 45 per cent), increased production techniques are expected to expand U.S. oil production by 750,000 barrels per day to 12.56 million according to the IEA. It was announced yesterday that oil shale producers have cut investment by $50 billion over the next 12 months.

With currencies of net crude oil exporting companies such as the Canadian dollar ( lowest level since March 2009), Norwegian krone and Russian ruble coming under renewed pressure and continuing until a bottom is seen in crude. The selloff in the price of crude has gathered pace after Friday’s report, but how much further can it go and what are the longer term outlooks on a technical analysis basis?

In the short-term, prices are likely to remain under pressure with at least one more push to the down side, possibly two, to finish the wave 3 down. Several supports have been broken in this move lower and there is not much support below the lows yesterday at ……… with the psychological level of $40 per barrel. However, with the RSI in the hourly showing oversold and divergence from the weekly opening low a turn higher could be imminent.

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Any pull back will find resistance between the 44.78 and 45.83 as well as 46.80 and 48, which following yesterday’s move seems a long way away.

 

Source: Bloomberg Charts
Source: Bloomberg Charts

 

Once the final wave down in wave C is completed below expected, a stronger rally to occur up to the $68.09 and the 61.8% retracement actually lies as high as 83.22 before the next leg down gets underway for lows somewhere between $20-$30 per barrel

Source: Bloomberg Charts
Source: Bloomberg Charts

 

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