Have we seen a top for crude?

With markets largely disregarding the latest production cut from Saudi Arabia, there is a feeling that OPEC is going to have to take some very firm steps to lower output if they are going to arrest the decline in crude prices.

The wider story of supply outstripping demand is likely to be something that is going to dominate the year ahead. The IEA recently noted that while we will see positive demand growth in 2019, that is likely to be outstripped by the rate of ascent for output, producing a glut of crude which will show up in inventories data. The graph below highlights this shift, with the first-half of 2019 in particular exhibiting this gap between demand and supply.

Interestingly, this has been backed up by OPEC today, with the monthly report seeing a shift in demand growth forecasts. Their latest demand forecast of 1.29 million bpd is some way off the July figure of 1.45 million bpd.

Contango

Crude markets have recently shifted into contango, heightening the fears over future prices. While contango is the normal scenario for a market, it is a shift out of the backwardation phase which is typically associated with a bullish market. The phenomenon of contango comes about when the future prices are higher than the anticipated spot price at maturity of the futures contract. Brent crude has been in backwardation for pretty much the whole of 2018 thus far, boosting the bullish case that has been in place. However, with the market shifting from backwardation to contango, there is a feeling that this is providing support to the notion that we could be due to see further downside for crude prices.

The chart

From a charting perspective, we are also seeing signals of a potential breakdown for crude, with the break below $70.49 in Brent providing the first lower low since 2015.

The monthly timeframe highlights the wider trend of lower highs since the 2008 peak. That trend has the potential to continue, yet while we are unlikely to break below the 2016 lows of $27.43, we do look likely to move into a more bearish phase for now. Near-term targets, in the event that this continues, would be a retracement of the $44.53-$86.65 rally. Thus, keep an eye out for the $60.62 61.8% Fibonacci retracement as a support area of note.

Finally, the intraday picture highlights a clear downtrend, with the rally caused by yesterday’s Saudi production cut announcement sending the price into the 61.8% retracement at $71.90. That level now becomes an area of interest which must hold for the short-term downtrend to remain intact. Given the substantial downside seen over recent weeks, there is a strong possibility of a break higher at some point to take part of that move back. However, unless we see a break through the most recent swing high (currently $71.90), further downside seems likely from here.