Oil forms a bearish channel

Oil markets are driven by supply, demand and risk and these have all turned against oil. The latter has subsided recently with the tensions in eastern Ukraine. An increase in supply and a decrease in demand led to a fall in the price of crude and the formation of a bearish channel.

A Ceasefire in Ukraine was reached over a week ago between the Ukrainian military and Pro-Russian rebels which forced the price of oil lower. There have been skirmishes reported in violation of the truce which led to oil touching the upper level of the channel, however, the truce should have a bearish effect on oil markets. The US is sending troops to Ukraine for military exercises with 14 other members of NATO, which should hopefully deter any escalation of the conflict.

The growing conflict in northern Iraq has largely left the oil refineries untouched as these are found in the south. The conflict is bad news for the region and from a risk point of view it could push the price of oil up were it to spread further. The intervention of the US should hopefully keep ISIS militants from marching further south.

From the demand point of view, oil markets reacted bearishly to Chinese data over the weekend, which saw industrial production fall from 9.0% to 6.9%. China accounts for roughly 11% of the world’s oil usage so a slowdown in production is likely to curb demand, putting downward pressure on prices.

Last week we saw crude oil inventories in the US decline less than expected. The market was expecting a fall of 1.50m barrels, however, only a fall of 0.97m eventuated. This means there is more supply (in the form of reserves) than the market was expecting. Further adding to supply was news from Libya’s National Oil Corp that crude output in the country has increased by 870,000 barrels a day.

Look for the bearish channel to continue in the near term with resistance for a movement toward the upper level found at 91.35, 91.91 and 92.32. Support for further bearish movements can be found at 90.86 and 90.43 with the lower level of the channel acting as dynamic support.

Fundamentals have conspired against the oil markets recently. A reduction in both global risks and demand, coupled with an increase in supply has put bearish pressure on the price of crude oil.