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Oil prices plummet as Saudi output set to fully recover, trading the breakouts

Big retracement as supply side woes may ease following comments from the Saudi energy minister that output set to recover by month’s end.

Oil well Source: Bloomberg

Oil prices drop over 6% on assurances that output recovery will be swift

As if the weekend attacks weren’t enough to imbue the oil markets with heightened risks by sending oil prices gapping higher Monday morning, comments from Saudi Arabia’s energy minister that output from the oil-exporting major would fully recover by the end of the month sent energy prices plummeting, even as other news reports quoted officials saying otherwise. And although the weekend gap hasn’t been filled, it has been keeping long traders tense should a downside price movement test their heavy long positions.

Oil sentiment: key figures

Retail bias, which stood at a heavy long 73% at the end of last week, was near the middle at 51% following a massive take-profit on long positions when the initial surge occurred. However, fresh longs have entered following the 6% price drop anticipating further price gains, and as of today morning the bias has moved 12% higher to a majority long 63%. That is still miles away from CoT bias of an extreme long 84%, and where unlike retail traders the bulk of those longs were initiated at far lower price levels.

Oil supply side and demand side factors

The focus thus far has been on supply side factors keeping energy prices both volatile and finishing lower and hurting both retail and institutional traders who are both majority long. However, while EIA will be released today expected to show a 2.1M deficit following yesterday's API surplus of 0.6M, demand-side factors will be in focus and will depend on how the Fed will react this evening. Should the Fed not introduce significant easing to the US President’s liking, and it could worsen the US-China trade war if the US imposes more tariffs on China as occurred last time the day after the Fed's 0.25% rate cut on July 31. The reason for its importance is that worsening trade risks would take oil prices lower on demand side worries.

Oil volatility: the technical overview and strategies

Oil Source: IG charts
Oil Source: IG charts

From a technical standpoint, given the drop didn’t undo all of Monday’s gains, the energy commodity’s price is still above all its main moving averages – both short-term and long-term, with a positive DMI, a non-trending ADX, and (relatively) at the upper extremes of the band. That translates into a consolidatory outlook with a positive technical bias. However, the underlying remains volatile and technicals hold less relevance in the face of fundamental forces, and hence conformist technical strategies involve not reversals but breakouts be they a buy off the 1st Resistance level of 59.99 with a stop loss of 59.37 and a take profit of 61.23, or selling the 1st Support level at 57.51 with a stop loss of 58.13 and a take profit of 56.27 anticipating a near complete closure of the weekend gap.

Those looking to trade a contrarian strategy should only do so after a reversal and not fade the increased volatility, with a sell off the 1st Resistance level of 59.99 but only after a reversal (wait for the level to breach first significantly and as it retraces sell at 59.99) for a take profit at 58.75 and a stop loss of 60.61, or buy the 1st Support level at 57.51 after a significant reversal with a stop loss of 56.89 and targeting the Relative Starting Point 58.75.

The information 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 Bank S.A. 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 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. See full non-independent research disclaimer.

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