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Crude steadies after slump

By David Morrison  |  12/07/2018 14:00

Crude oil suffers biggest one-day sell-off since February 2016
Yesterday afternoon crude oil slumped in a move which saw WTI decline by over 5% in under four hours. Brent lost around 6% over the same period. Both contract have managed to steady in early trade today. However, the buying has been tentative so far and looks more like short sellers booking profits than traders establishing fresh long positions.

There’s certainly good reason to be nervous. This was no ‘flash crash’ caused by an algorithm misfiring or a physical ‘fat finger’ trading error. The fact that every attempt at a rally was quashed by a wave of fresh selling, and that this developed over a period of hours rather than minutes suggests some serious unwinding of long positions.

The sell-off also began soon after the US Energy Information Administration announced an unexpectedly large inventory drawdown. Stocks of US crude oil fell by 12.6 million barrels in the week ending 6th July compared with an expected decline of 4.1 million barrels – the biggest drawdown since September 2016. The news saw oil prices spike higher initially, although this move reversed quickly.

Oil analysts said the catalyst for the sell-off was news that four Libyan oil export terminals were reopening for business. Their closure had effectively shut off Libyan exports since last month.

But the sell-off wasn’t confined to oil. Other commodities also fell sharply including gold, silver, copper and softs such as wheat, corn and soyabeans. The underlying fear in the commodity space at least is that the recent US-Sino tariff tit-for-tat is set to break out into an all-out trade war. Of course, you wouldn’t think so from a quick glance at US equity markets where key indices such as the NASDAQ 100 and Russell 2000 hover near record highs. The feeling here is that the US will ultimately be the winner from tariff action and in the meantime second quarter earnings are set to be strong. So different markets are responding to different drivers, although it’s hard to see how an escalation in tariffs and trade restraints can really be positive for asset prices.

Looking at the daily chart of front-month WTI – as we can see, yesterday’s move once again saw crude drop out of its upward-sloping trendline as illustrated here by Andrews’ Pitchfork. However, we’ve seen oil break back into the trend channel before and it could easily do so again. However, momentum as indicated by the RSI is pointing down from close to overbought, and there’s a slight negative divergence between the RSI and the WTI price. Overall, it’s inconclusive with support around $66.30 and resistance just below $74.00.
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