Crude Oil – is it time to buy the dip?

Crude Oil has retraced from highs of $73 per barrel hit last month and currently sits at $66.22.  Weekly inventory storage figures have been mixed recently, as well as dampening news flow over the past few weeks.  Add in profit-taking with a reduction in the unprecedented bullish positions, and a pullback was inevitable. However, with green shoots now starting to show on the price chart, is the retracement complete?

The weekly chart appears to indicate a decent setup. Price action has so far dipped below the 20-period Moving Average (MA) but resisted closing below. And note last week’s ‘Hammer’ candle which is generally an indication of a reversal of a downward trend. Also, the price bounced off a diagonal support (red dotted) line extending from the lows of early 2016, which has been touched a number of times, proving it’s worth. In fact, it’s often diagonal support/resistance lines that confirm a trend – note the purple dotted line extended from the low of 2017, and how this week’s candle has touched it and dropped back. I would be looking for a close above here to confirm a further move north, which would also mean a close above a horizontal resistance (1) of $66.10.

If support is broken, I suspect the $60-$62 zone to be very strong resistance. This is a key dividing line of the chart which was primarily created from a period of consolidation in 2015 and was retested with a strong bounce in April this year – not to mention the fact $60 is a nice round number!

In the event of claiming a victory over resistance level 1, further resistance look to be at the previous high, $71.3, and $76.50 would be my next peak target should that be broken – that’s a plausible target which could be hit in the Autumn while remaining in the current upward trend channel. The Relative Strength Index (RSI) is giving mixed signals, with both higher highs and lower lows in this cycle, but consolidation and a lowering RSI now gives plenty of available headroom for a run higher.

As reported last month, Russia and Saudi Arabia are potentially relaxing the OPEC and Moscow global output cap. The move looks to be more about cooling off the recent stampede in pricing rather than plugging any major deficit in supply, with the US continuing to increase its output.  While the Saudi’s desire higher oil prices ahead of the float of Saudi Aramco, equally they are unlikely to want to cause distress to the US economy with excessive price levels. A happy medium for Crude is likely to be $60-70 range.  There are however ongoing geopolitical threats to supply, namely Venezuela’s struggling output and sanctions on Iran, that could trigger a spike in demand.

All eyes will be on this week’s Crude inventory figures from the US Energy Information Administration (EIA).  The last 3 weeks inventories have seen a large build of of 5.778M on 23rd May – which appeared to be largely down to an increase in US imports that week – A draw of 3.620M on 31st May, and another build last week of 2.072M.  Last night’s announcement from the American Petroleum Institute (API) predicts a small draw in inventories but a build in products. The EIA report tends to be the most influential, but almost always conflicts with data from API, and there is much debate by oil commentators over the data’s relevancy on a global scale.  Nonetheless, news moves sentiment while the true state of affairs remains difficult to piece together. Whatever the weekly noise may be, it appears for now that $60+ oil is here for at least the short term, and the oil sector remains in recovery.

Author: Stuart Langelaan

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