Crude oil price weakness sees key support level come into play

US-China trade talks hit the buffers, driving crude prices lower. Could this spark a wider sell-off?

Oil pump Source: Bloomberg

Crude prices have slumped over the course of the past fortnight, with Brent currently almost 7% down from the late-April peak. The conflicting desires of United States President, Donald Trump, and the Organisation of the Petroleum Exporting Countries (OPEC) have largely benefitted the price of crude, with the restriction of output from OPEC+ boosting prices despite huge output from the US. Today has seen the Energy Information Administration (EIA) announce projections for the coming years, and once again we are expecting to see US production rise through the years, with the 13 million barrels per day (bpd) milestone reached by the end of this year. Looking at the chart below, we can see the enormous rise in production over the course of the past decade, with the shale revolution giving way to a mammoth expansion in output.

US output chart

US output chart

The current issue that is denting confidence in crude prices is in relation to the deterioration in trade talks between the US and China. The further deterioration in Chinese and global growth rates could have a detrimental impact on demand for fuels. With Trump threatening a new round of tariffs on Chinese goods on Friday, this week is going to be an interesting one for crude markets. US and Chinese negotiators are meeting tomorrow with the hope to avoid such an escalation of the trade war, and thus we are expecting to see further volatility to come tomorrow when the outcome of those talks emerge.

Charting-wise, we have seen a deterioration through trendline support, with the price finding support on the 200-day simple moving average (SMA) indicator. This is also the first time we have seen the lower Bollinger band breached for the first time in 2019. With the stochastic highlighting a clearly overnight market, the reaction to this zone of support is going to be key. Typically, we would look for a convincing closed candle outside of the Bollinger band to provide us with a signal that the current direction is going to continue without a reversion towards the 20-day SMA.

Brent daily chart

Brent daily chart

The four-hour chart highlights the creation of a bearish head and shoulders formation last week, pointing towards further downside. However, we have since seen substantial consolidation rather than a single directional move. Much of this is going to be associated with the volatility seen throughout financial markets this week. However, with this notable support zone below as seen on the daily chart, it makes sense to watch for how the price of crude reacts to the support area around Monday’s low of $68.72, as a signal of whether we are set for further downside from here on in.

Brent 4hr chart

Brent 4hr chart


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