Crude oil's bearish trend weakening

The price of Brent oil is little-changed today after dropping to its lowest level since June 2012 last week. Once again investors are by and large ignoring the prospects of supply disruptions in the Middle East amid the US-led bombings of IS targets in the region. Likewise they seem little concerned about the fact oil production in Libya has fallen slightly: according to the National Oil Corp (NOC), the country's crude output has fallen by 25,000 barrels to 900,000 barrels per day (bpd) due to a strike at its Jalo oilfield. Still, the country’s oil production remains some 800 per cent more than just a few months ago when the rebels were occupying most of the oil fields and export terminals. However, most of the supply-side news has already been priced in, so in the absence of any further bearish news from the demand side of things, prices may stage a short-covering rally soon, perhaps as early as this week. And with the colder months now just around the corner, demand for heating may cause prices to rise anyway. That or the OPEC may move to cut production if oil prices remain persistently weak.

In the US, oil prices have risen slightly in recent days. The WTI contract has been lent some support in part from a bullish oil report that was released on Wednesday of last week, which suggested that demand from refineries was higher than anticipated. If we see another sharp drawdown in oil stocks this week, then prices may stage a more profound rally. On top of this, there are plenty of economic numbers scheduled for release this week. If they are mostly positive then oil prices may find additional support. The opposite is also true.

From a technical point of view, Brent has been stuck in a strong downward trend. But the good news is that this trend has not accelerated in recent days, which suggests prices may be forming a short-term bottom. This view is supported by the fact price has been unable to hold below the 2013 low of $96.75 on a daily closing basis thus far. Unless Brent closes below here – in which case a drop to $95.00 or even $90 could become a possibility – there is a chance it will break above sturdy resistance at $97.50 and head towards $100 before making its next move. Meanwhile WTI (figure 2) has just broken resistance and a bearish trend at $93.50. This break has been confirmed by the RSI forming a triple divergence recently, suggesting the momentum has already shifted into the buyers’ favour. The next resistance is at $95.00 followed by $95.50 (50-day SMA) and then $96.00.

Figure 1:

Source: FOREX.com. Please note this product is not available to US clients.

Figure 2:

Source: FOREX.com. Please note this product is not available to US clients.