Moving away from the FX market, the daily chart of US crude is looking increasingly bearish on any timeframe. Focusing on the daily chart we can see price has broken through the support level of the bull flag pattern and is gravitating lower and holding below the 5-day EMA (exponential moving average). On the momentum side we saw a close through the 38.2% retracement of the February to June rally overnight and this really defines that the bears are in total control here.
The clear downside targets are now $40.00 (which is also the 50% retracement of the aforementioned move) and then $37.13. It’s also worth highlighting that oil is a touch oversold in the short-term so short entries could be more compelling on a rally into $43.00.
Fundamentally, a number of the bullish factors that caused such strong appreciation from February have started to reverse course. From October 2014 to May 2016 we saw the US Baker-Hughes drill rig count collapse 80% in response to falling oil prices. We have seen the rig count increase by 41 over the last four weeks. We have also seen gasoline inventories increase for the past three consecutive weeks, the first three week gain since January. Overnight we have also seen a strong miss to the weekly official oil inventory report, with the market positioned for a drawdown, when in actuality we saw an increase of 1.67 million barrels.
Oil should firmly be back on the radar given the implication this could have on global equities and inflation.