Key Points:
- Short term technical time frame may be turning bullish.
- Fundamental over supply remains and is likely to impact medium term view.
- Watch for a short term break towards the $47.00 – $48.00 handle.
The past few weeks have proved relatively negative for crude oil as the commodity has continued to sink lower in the face of surprise inventory builds and ongoing concern about the current direction of prices. Subsequently, you might be forgiven for being tempted to take a short term bearish view on the commodity but we might just be setting up to see a sharply bullish move in the coming weeks.
Historically, crude oil prices are currently plumbing the depths of decline with WTI down around 12% so far for the month of June. In fact, we are literally looking at the longest string of declines since around 2015. However, there are some significant technical factors which now suggest that we could be about to see some significant upside moves in the coming weeks.
From the fundamental perspective, we are about to head into hurricane season in the Gulf of Mexico. Subsequently, the risk of rig disruption, due to incoming storms, is a relatively real prospect and this would impact production in the Gulf region. The typical storm season is normally between August- November but the first major hurricane of the year has already made landfall and impacted production.
In addition, the question of OPEC’s effectiveness remains a key concern within the global oil markets and there is some question as to the cartels ability to further restrict enough supply to impact prices by any measurable amount without damaging their respective member’s economies. This is an especially valid question given that U.S. shale oil producers continue to advance production whilst lowering their respective costs. Subsequently, it remains uncertain if OPEC can have much in the way of an impact on U.S. crude inventories.
However, the latest suggestion is that Saudi Arabia could indeed change the flow of exports away from the U.S. and artificially impact inventory figures. Unfortunately, this ignores the basic premise of the economics of Shale oil. Any measurable rally back towards the $50.00 handle is only going to bring with it increased domestic rig counts and additional production. Any such strategy would simply release further market share to the shale sector.
From the technical perspective, bullish pressure is starting to mount as price action appears to have failed on any meaningful decline below the rising trend line. In addition, the RSI Oscillator is now rising sharply away from oversold territory and price action is now rising, albeit on a short term basis. Subsequently, from the technical perspective, there are plenty of reasons to expect a big move higher in crude oil prices in the coming week.
Ultimately, the technical indicators are likely to win out in the short term and we are, subsequently, likely to see some resurgence in oil prices back towards the $48.00 handle. However, our bias changes over the medium term given the various fundamentals that are at play. In particular, the ongoing over supply issues are likely not going away any time soon so expect there to be plenty of further pain before rebalancing within the market is finally complete.
