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WTI breaks below trend-line

By David Morrison  |  05/06/2018 15:30
Both Brent and WTI have taken a tumble leading some traders to wonder if we’ve already seen the highs for this year

Both Brent and WTI crude have sold off sharply ever since hitting their respective three-and-a-half year highs less than a fortnight ago. The steepest part of the sell-off came after Saudi Arabia and Russia said they were considering adding back some supply to the market. They are thought to be discussing a reduction of the OPEC/non-OPEC (or OPEC+) production cut to 800,000 barrels per day (bpd) from the 1.8 million agreed at the end of 2016. It appears that most other producers involved in the original agreement weren’t consulted about this change. However, last weekend there was an unofficial meeting of several key energy ministers in Kuwait who declared their determination to ensure “healthy market conditions” which would stimulate investment while keeping the global oil supply stable and sufficient to meet demand.

This morning Bloomberg reported that the US government asked Saudi Arabia and some other OPEC members to raise oil production by 1 million bpd. President Trump has already blamed OPEC for artificially high oil prices in a tweet posted mid-April and he’s making sure the cartel gets the blame for higher US gasoline prices.

Of course, the resumption of US sanctions on Iran (which are being reluctantly backed by other countries) had contributed to higher crude prices. Some analysts estimate that these sanctions could take as much as 1 million bpd off the market. On top of this, Venezuelan exports continue to slump due to the parlous state of that country’s economy. This has been causing concern as the OPEC+ output cuts have already reduced supply significantly, bringing developed-world inventories back to their 5-year average. The worry is that the oil market is set to tighten further and that this could lead to prices heading up towards $100 per barrel. This is the kind of price area that would boost inflation and simultaneously weigh on growth.

Of course, there’s also the uncertainty surrounding President Trump’s imposition of trade tariffs, most recently on steel and aluminium from the EU, Canada and Mexico. The worry is that any serious escalation in tit-for-tat tariffs may trigger a wider trade war. This could negatively impact demand for crude just as OPEC+ boosts supply. It is this fear which is helping to put a lid on prices for now.

But many investors don’t see Trump’s tariffs as particularly troublesome. They feel there’s little chance of any serious retaliation and minimal likelihood of a full-blown trade war developing. The reasoning behind this is that Trump is simply playing to his base, making all the right noises but with no intention of following things through ahead of mid-term elections this November. That may be so. But it would only take a small miscalculation in terms of the reactions from trading partners for his plan to get blown out of the water, and earlier today Mexico announced a retaliatory 20% tariff on US pork imports. So, there are plenty of moving parts here which will affect the oil price as they shift and interreact with each other.

As far as the daily chart is concerned, the front-month WTI contract broke below the lower trendline of the Andrews’ Pitchfork I drew on a few weeks ago. It then rallied back up and managed one close above here before once again pulling back sharply. It has also broken below the 23.6% Fibonacci Retracement of the June 2017-May 2018 rally and yesterday WTI broke below the 100-day exponential moving average (EMA).

So, it would appear that the path of least resistance is down for now, at least when considering the relatively arbitrary and subjective drawing tools I’ve highlighted here. But we do know what a speculative and volatile market crude is, and how quickly it can reverse a move on a single comment from any of the world’s major oil producers. One thing is for sure, and that’s a lot can happen between now and the ‘OPEC+’ meeting on 22nd June.
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