Oil Tumbles for a Second Consecutive Week

West Texas Intermediate Crude moved from below $45 a barrel to over $65 a barrel from December through April, but after breaking the $65 mark, the price has tumbled in recent weeks. As of Friday morning, the price was flirting with a key support level in the $55 area.

The weekly chart below doesn’t reflect the downward move on Friday morning, but it does show the price drop in recent weeks. It also shows how crude had trouble breaking above $55 back in early 2017 before moving above the price later in the year.

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The sharp decline in the fourth quarter of 2018 didn’t even stall at the $55 level, but the first attempt at a rally in early December failed just below that area. Now with the price falling once again, I have to wonder if $55 will act as support.

The downward move is a little surprising for several reasons. First, we are entering what is considered peak driving season in the United States. Secondly, tensions between the United States and Iran have ramped up in the past month or so, and when political tensions increase in the Middle East, it usually results in a spike in oil prices. We also have the political mess in Venezuela hampering oil output in that country.

Looking at the opposite side of the situation, U.S. oil inventories have increased dramatically in recent months and are currently at their highest levels since mid-2017. The most recent oil inventory report that was released on Thursday showed a slight decline in inventories, but oil prices still fell over 3% on the day. The chart below from the U.S. Energy Information Administration shows how inventories are well above the historical average.

The inventory level seems to be the biggest culprit in what’s driving oil prices down. The tensions with Iran haven’t made much of a difference and, so far, the seasonal aspect of oil demand isn’t having an impact.

I was talking with an old high school friend on Thursday, and we were discussing how oil and gold hadn’t really responded to the latest tensions between the U.S. and China in the trade war and the other geo-political events. With the new announcement from the Trump administration regarding tariffs on Mexico that came out Thursday evening, gold prices jumped and oil continued to fall.

Part of the thinking from oil traders could be that they believe the trade war with China and the new tariffs on Mexico are going to lead to a global economic slowdown. This would lead to a decline in oil demand and thus the reason the price has fallen so sharply in the last five weeks.

As for whether or not oil will find support at the $55 level, something I took note of that was concerning was the sentiment toward oil. Looking at the most recent Commitment of Traders report for oil, we see that large speculators are still long a substantial number of contracts.

Looking at the net long position of large speculators back in December and early January, the position was in the 300K contract range. As of last week, the net long position was still above 478K contracts. Given the selling we have seen in oil over the last few weeks, I would expect the net long position to decline rather sharply, but I don’t think we see it drop to the 300K level.

What this suggests to me is that we may not have reached a bottom in oil prices just yet. For oil bulls, I think the $55 area is a key technical support level, but I’m not sure it is going to hold based on the current sentiment outlook. If the price does fall below $55, the next technical support level is down in the $45 area.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

One comment

  1. Edouard D'Orange

    Drawing a rough line through the two bottoms, early 2016 and late 2018, I get a low of around $48. Looking at the technical side, the RSI will drop to around 30 and sentiment will reach 20 (very oversold) at that point. Sounds a bit implausible with all the other factors which should drive up the price, that is, unless something unexpected happens. Which never happens these days (wink).

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