“technical” mistake that threatens a collapse in crude oil prices
Oil has had a somewhat turbulent recent few days. Good evidence of this was the intense drop in barrel prices of more than 5% last Wednesday after the Department of Energy published a new increase in US stock levels. Overall, the price of oil ended the week down more than 6%, leaving Europe’s benchmark Brent crude at $83.8 and the U.S. benchmark hovering around $83.8. 78-79 dollars. These falls put the price of crude oil on the brink of a technical precipice. The loss of West Texas $80 meant the destruction of psychological support for this type of crude oil, which could now face another decline: “Its price has entered a correction phase.” Technical analysis, while sometimes controversial and criticized, is often a reflection of what is happening in the market (fundamentals and sentiment), so the main question is why is the price of oil correcting?
“The 6% fall in Brent crude prices last week was partly due to easing concerns that escalating fighting in the Middle East could threaten oil supplies. Geopolitics in this region will continue to be a major focus in oil markets over the next two months,” they said from Capital Economics. Just as the Middle East inflated oil prices when all-out war between Israel and Iran seemed inevitable, it is now playing the opposite role as tensions ease.
What seems clear is that oil prices have been under pressure in recent weeks. “Political developments in the Middle East appear to be driving short-term trends,” commented Carsten Fritsch and Barbara Lambrecht, economists at Commerzbank, also hinting at easing tensions between Israel and Iran. But focusing on geopolitical risks when analyzing oil is a mistake. There are fundamental factors in the market that also provide clues, while technical analysis shows that oil faces a dangerous abyss. This area could act as support and prevent further declines, but any “push” (new stockpiling data or other bearish factor for crude oil) could cause oil to fall several dollars at once.
Oil reserves are rising
Inventory data doesn’t help either. U.S. crude oil inventories rose sharply last week, according to data released Wednesday by the U.S. Energy Information Administration. Commercial crude oil inventories, excluding the Strategic Petroleum Reserve, increased 7.3 million barrels to 460.9 million barrels in the week ended April 26, according to the EIA.
Analysts surveyed by The Wall Street Journal predicted a decline in oil inventories of 1.5 million barrels. Rising oil inventories are usually a harbinger of further declines in crude oil prices.: As more crude oil accumulates in storage tanks, less crude oil will need to be produced in the coming weeks to produce gasoline, diesel…
A little over a week ago, commodities research house BloombergNEF published that based on current levels of crude oil inventories in developed countries, the price of oil should be about $25 below current levels. However, the risk premium resulting from wars and tensions in the Middle East is keeping oil prices relatively elevated. This hypothesis is consistent with the evolution of crude oil prices as tensions between Israel and Iran ease.
The Fed is no longer thinking about cutting rates
Another important point that seems to go somewhat unnoticed is the change in the road map of central banks and, above all, the US Federal Reserve. Everything indicates that there will be no rate cuts in the world’s leading economy this year. Even if they eventually arrive, the pace and intensity will be lower than expected. High interest rates in the US, in principle, mean more subdued demand and investment, and therefore lower oil consumption. On the other hand, high rates strengthen the dollar in relative terms, which puts downward pressure on the price of crude oil (to find buyers) denominated in dollars.
In addition to the above, on the supply side also There is some disagreement within OPEC. The cartel countries are starting to get nervous because they have been cutting production for months now in economies that are capable of pumping much more oil than they currently pump. Overall, “OPEC produced more crude oil than agreed in April. According to a Bloomberg survey, oil production in nine countries included in OPEC+ (OPEC-9) targets exceeded the agreed level by 426,000 barrels per day,” they say. from Commerzbank.
“More than half the deviation was due to Iraq, which produced slightly more in April than the previous month, resulting in a deviation of a good 220,000 barrels per day. According to Reuters research, Iraq cut its output slightly in April, but was still 140,000 bpd above target… Bloomberg data on Iraqi oil exports confirm this picture. According to the data, oil exports in April increased to 3.41 million barrels per day, which is 250 thousand per day more than in March,” experts say.
Iraq and Kazakhstan had to demonstrate to OPEC their plans to reduce oil production, but it is one thing to show the plans, and quite another to implement them: “The next ones will show whether these plans are being implemented. Otherwise, it’s the will of others.” As a result, there will be excess supply in the oil market and oil prices may come under pressure,” warns Commerzbank.
Technical oil chasm
Everything that happens in the “real” market, what happens with fundamental indicators (demand and supply), is reflected in technical analysis. Prices they move by drawing graphs, the interpretation of which can put more pressure (up or down) is still in line with the trends that prices are already showing. In the case of Brent, the $83 area is expected to provide some support to crude oil prices, while in West Texas the area is at $78-$79. However, any bearish development could lead to a fall in crude oil, which could push oil prices to the lows of recent years.
Joan Cabrero, advisor to Ecotrader, explains in statements to elEconomista.es that “losing the support that crude oil had at $80.70 in West Texas. “warns us that its price has entered a correction phase of the broad upward movement that began late last year at $68 and is at the April highs around $87.80.”
“A 61.80% Fibonacci retracement, or two-thirds of that rise, which is Dow Theory support, would mean a fall to $75.35 and $74.50, respectively. height, We’re talking about $68, which would be most likely if I lost $72,” Cabrero says..
Windsor Broker analysts noted last Friday that West Texas had lost important psychological support, falling below $80. The market is currently dominated by bearish sentiment. Investor sentiment could worsen the sell-off in the crude oil market and lead to further declines in oil prices, which would certainly significantly ease the renewed inflationary pressures facing the US and Europe.