Crude recovery unlikely to last

The price of crude oil surged higher yesterday, having initially dropped to a fresh 6-year low on the back of another big jump in crude oil stocks. Undoubtedly the biggest catalyst behind the oil rally was the dollar. The US currency plummeted after the Federal Reserve produced a surprisingly dovish statement in which the central bank implicitly said that it remains patient when it comes to future rate rises even though it dropped the word “patient” itself. As the dollar plunged, every buck-denominated asset – and U.S. equities – rallied, including crude oil and gold. WTI rallied back above the January low of $43.55 that was only taken out earlier in the week, which must have triggered a cluster of buy stop orders above this level. This undoubtedly exacerbated the short-squeeze rally, which eventually ran out of steam at just over $46.70 where the buyers took profit and prices have ease off further from there in today’s session. Incidentally this $46.70 level corresponds with the shallow 38.2% Fibonacci retracement of the recent downswing, so the sellers may still be in control.

In fact, this counter-trend move may have provided the bears another opportunity to expand their bets, for the fundamental outlook on oil remains anything but bullish. The latest build in US stockpiles of 9.6 million barrels, for example, has pushed inventories to another record high. Not only was this once again significantly more than expected (4.1 million) but it was also the tenth consecutive weekly increase. What’s more, Cushing stocks surged to another record high of 54.4 million barrels, this time with an increase of 2.9 million barrels. Evidently, US oil producers are still undeterred by the significantly weaker prices as they continue to fend off competition for market share from the OPEC. This therefore argues against a more profound price recovery in the short term. But by around the middle of the year, the growth in US crude production may dwindle a little which could put an end to the rout once and for all.

Short-term bearish speculators may be concerned about WTI’s potential false breakdown at $43.35, although there is an argument that the corresponding rally from there could prove to be a bull trap. As such it is vital to keep an eye on the key technical levels going forward. The previous resistance levels at $45.00, $44.15 and $43.55 may now turn into support. However if they don’t then this should be viewed as a bearish sign. On the upside, a break above the 38.2% Fibonacci retracement level at $46.70 could pave the way for a move towards the next resistance around $48.00. The key resistance level is around $49.55 which corresponds with the 61.8% Fibonacci retracement of the recent downswing.

Brent’s counter-trend rally has likewise come to a halt around its own 38.2% Fibonacci retracement level and resistance around $56/$57. But if it goes on to break above this area then a move towards the next resistance at $58.50 or the $61.8% Fibonacci retracement at $59.00 could get underway. As before, the key support level sits at $52.00, which incidentally is also a 61.8% Fibonacci level. Did we say we like Fibonacci?