Oil prices fell by a good 2.5% during Monday’s session and were down again at the time of this writing on Tuesday afternoon. Several factors are weighing on oil prices, including the small recovery in the dollar and the potential unwinding of the recent rise in net long positions from bullish market participants. Above all, it is the ongoing fundamental issue of excessive supply that is continuing to weigh on oil prices. On this front, not a lot has changed despite the OPEC and Russia’s efforts recently. While these producers have tried to limit their oil output, U.S. shale oil continues to rise. Indeed, according to the U.S. Energy Information Administration, U.S. shale oil production in September is set to rise by almost 120 thousand barrels. If the EIA is correct, this would put U.S. oil output to a record 6.15 million barrels per day. The recent rise in drilling activity means more shale supply is coming on stream. At the moment, one of the few factors that could help support prices would be if there are further sharp falls in oil inventories in the United States. Supply data from the API and the EIA will be released within the next 24 hours. If the stockpiles data show builds instead of sharp drawdowns, then there is a risk that oil prices could fall further.
From a technical perspective, both oil contracts remain within their existing wide consolidation ranges, so the long term trend is still not clear. Recent price action has been bearish, though. For example, Brent’s futile attempt to move away from the 200-day moving average last week was a clear bearish sign. As Brent broke out of its prior consolidation range, it hit even stronger resistance between $53.25 and $53.70, an old support range. The buyers were trapped, and the market has since broken a couple key support levels, including $51.30/5 and $50.90/5, levels which could turn into resistance going forward. What happens next may be determined by price action around the next area of support between $49.60 and $50.20. If we see the buyers step back in here then this would keep the rising trend line intact. Otherwise, a break of the trend and support at $49.60 would be further confirmation for the bears, in which case they may increase the pressure further in the coming days. Meanwhile, WTI is showing a pretty much similar picture in that it has also failed to hold above the technically-important 200-day moving average. But, like Brent, it hasn’t broken its bullish trend line yet. Thus the higher lows remain intact, at least for now anyway.
Only when Brent and WTI break above their respective 200-day moving averages and bearish trend lines will the trend turn decidedly bullish (see the annotations on the charts). Until and unless that happens, the trend is at best choppy and range-bound and at worst bearish. For that reason, crude oil still remains day traders’ market, not trend followers’.