Crude oil rebounds to potential resistance amid risk rally

Oil prices fell sharply on Wednesday on the back of a big rise in US crude inventories, which raised excess supply worries, before rebounding again this morning along with other risk assets thanks to rising optimism over a US-China trade deal, which boosted the demand outlook for oil. As a result of these conflicting factors, the price of oil rose back to where it had been hanging around for the past few days by late afternoon UK time: $57.50.

However, it remains to be seen whether today’s gains can be sustained. With US crude inventories climbing consistently over the past few weeks and Saudi’s oil output returning to normal very quickly following those attacks on its infrastructure in mid-September, the potential upside looks set to be limited over the medium term. Indeed, according to OPEC’s own estimates, the global demand growth is forecast to slow from around 1.4 million barrels per day in 2018 to “around 0.5 million bpd towards the end of the next decade." This therefore reduces the call on OPEC crude oil supply. The cartel must maintain its ongoing production agreement with the likes of Russia if they are to provide any real long-term challenge to US shale. So, while further short-term gains cannot be ruled out, the upside looks limited from here.

Although WTI created a bearish engulfing candle on the daily following yesterday’s sell-off, we have not seen any follow-through in the selling pressure so far. So, the bulls remain in control for now. The bears will need WTI to break and hold below support around $56.30 if they are to see any real weakness in prices. At the time of writing, crude was back around the key resistance area of $57.20 to $57.50, where it has struggled over the past few sessions. Here, old support meets the 200-day moving average and the 50% retracement of the entire drop from the post-Saudi-attacks high. So, there is still a possibility it could fall back, although the bears have already had several chances to push prices lower by now and yet they haven’t been able to do so. Therefore, a closing break above this region would negate any short-term bearish bias. In this event, we could see oil prices rise towards the next Fibonacci retracement levels at $58.60 (61.8%), $60.70 (78.6%) or even the $63.30 high. Today’s close should therefore provide a good technical indication where prices are headed over the next few trading days.

Source: eSignal and FOREX.com.