Crude looks set for another leg lower

After a period of strength for Brent, it seems the sellers are back. Could we be seeing the beginning of yet another sell-off?

Crude oil processor
Source: Bloomberg

Recent gains in oil prices have got people feeling a little more positive about the commodity that really hit the skids between mid-May and mid-June. However, we are starting to see the sellers come back bringing us into the realms of a potential bearish reversal for this market.

June saw Organisation of Petroleum Exporting Countries (OPEC) pump the largest amount of oil this year, despite their production cuts. This saw the cartel raise output by 260,000 barrels a day compared with May. Around 50% of this can be attributed to the rise in output from the likes of Libya and Nigeria that are outside of the recent production deal. Meanwhile, if you look at the US, we continue to see the rig count rise, which is a proxy for expected output from the nation. Only once we begin to see rigs fall, we will begin to expect a decline in output, and even then it will see a multi-month lag delay.

On the supply side, we have entered the crucial month of July which is a peak driving season in the US, thus typically leading to a sharp drawdown in stockpiles. The trend over recent months has been towards drawdowns in US stockpiles, with ten of the past 12 weeks posting a reduction in stocks. However, with those two rises coming in the past four weeks, there is a reason to believe that the demand is drying up somewhat as we move into July. Certainly it seems the US demand picture is doing pretty well, but keep an eye on the crucial inventories releases in the coming weeks, for this is the peak time for a strong drawdown. If it does not come, then there will be significant pressure on the price of crude.

Elsewhere, there has been a slowdown in demand from key markets such as India and China, which obviously does little to help boost the price of oil.

Looking at the Brent chart, the wider picture is overwhelmingly bearish. The weekly timeframe highlights the gradual move back into the critical $44.11 support level. A break below there would likely pave the way for a significant period of weakness.

Looking at the daily timeframe, we have a nice clear-cut market, with wide swings in either direction. Today clearly shows a shift in sentiment, with a reversal in the offing. This of course tallies up with the downtrend we have seen in recent months. Looking at the stochastic, we have seen it form a strong bearish sell signal upon crossing back below 80, adding to the picture price action gives us. This points towards a sell-off back below the $44.54 support level just to continue the recent downtrend.

Finally, the hourly chart completes the picture. We have seen the price crash back below the crucial $48.56 support level today. This comes after the break lower from an ascending channel earlier in this morning. The fact that we have this long term bearish outlook, which now tallies up with a bearish break in the short-term price action provides a strong sell signal. With that in mind, further downside seems likely from here, with $49.38 providing the near-term resistance level to take note of. The recent rally always seemed like a short-term phenomenon, and so it seems to be that the oil market is moving back into the bearish trend seen over recent months.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

Find articles by writer