Trader thoughts – oil ready to break below $50

We need to look at price action, trend and set-up to see how the market aggregates all the news flow whenever there are conflicting fundamentals at play in any market.

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Source: Bloomberg

The strong supportive factor has been that estimates around OPEC (and select non-OPEC nations’) output have been coming down in the last two weeks, suggesting the market believes the agreed cuts to production will actually be adhered to. This focal point should get even greater attention in the lead up to the May OPEC meeting.

What we are seeing in the charts, though, is the bears taking control. The weekly chart of US crude is very interesting if we look at price action and the candle patterns. We can see this week candle failing to break above last week's high, with the sellers swiftly kicking in, and it certainly seems as though the price will close firmly below last week's low. From a weekly perceptive the key level is the January low of $51.34, so a weekly close below this level should be taken as a bearish development and opens up a nice move below $50.

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If we take the time frame into the daily chart, we can see price breaking trend support at $52.74, which again throws weight behind the probability we could see lower levels materialise in the short term. Again, on this time frame we can see the significance of the 10 January low here, so a break of $51.34 could see the April uptrend at $46.60 come into play. That would be the clear target for those who are short.

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The fundamental driver that has really caused the price to head lower has been the strong supply response from US shale producers since May 2016. In this period we can see the Baker Hughes rig count has increased some 80%, showing that US firms, who obviously weren’t involved in the OPEC agreement, have been using the rally in price to increase output as it moved through their breakeven levels. The Energy Information Administration (EIA) has really brought this home in their February review by forecasting that US crude output will average 9.53 million barrels a day in 2018, up from 9.3 million in their January review.

Most importantly, if we look at positioning through the weekly Commitment of Traders report, we can see a record net long position of 380,000 contracts. So as US shale gas companies have brought output back online, in turn altering the supply-demand dynamic, we can see a clear position adjustment with traders closing long positions and pushing down the price.

So we really have to be watching the $51.34 level as a daily close below here would get the bears quite excited. A weekly close below this level would really get the conviction up that price will trade through $50.

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