Crude oil demand worries grow, but techs point to a possible bounce

As the new week gets underway, crude oil prices are again under pressure with Brent down 0.5 and WTI off by 1 per cent. Both oil contracts are weighed down by weaker demand and excessive supply fears. These concerns have been brought to the forefront after some of the major oil agencies such as the EIA, IEA and OPEC last week reduced their global demand outlook. China’s surprisingly weak industrial data that was released at the weekend and the growing western sanctions on Russia, which pose a great risk to economic growth and in turn crude demand from the world’s fifth largest oil consumer, underscores those worries. Supply meanwhile continues to grow. In Libya, for example, output has risen to 870,000 barrels per day from 810,000 bpd last week, according to the National Oil Corp. In October, the country’s oil production is expected to climb to 1 million bpd. If there was one other reason that could explain oil’s weakness it is this: the rallying dollar. The US currency has been climbing for weeks now as investors look forward to life after QE and the first rate hike early next year. But as the US economy improves so too should demand for oil, which means the impact of the dollar is only temporary, especially on WTI. What’s more, with the summer now beyond us demand for heating should begin to pick up as the weather turns cold. Having said that, the excessive supply and the still-weak global demand argues against a sustained rally.

From a technical point of view, both oil contracts look oversold and a bounce back could be on the cards over the coming days. Last week saw Brent fall to $96.75 – the low that was achieved in 2013 – before bouncing back slightly. But with both the daily and weekly RSIs in the oversold territory, the London-based oil contract looks oversold from whatever angle you look at it. (One a side note, the RSI is one of the most closely-followed secondary indicators.) Therefore, there is a chance for some sort of a short-covering bounce around this key support area. Resistance comes in around $98.75 followed by the psychological level of $100.00. A break below $96.75 however could potentially pave the way for $89.50/$90.00, which is the next logical support.

The WTI contract has already dipped below the $91.50 level where it had found major support in early January. But the bears have so far been unable to hold their ground there, resulting in a possible false break, which is a major reversal pattern. As a result, WTI may push higher from here towards the next level of resistance at $94.00 or even $96 over the coming days. Meanwhile the RSI is in a state of positive divergence, suggesting that the bearish momentum is weakening. If eventually it manages to break above $96.00, then that could lead to a sharp rally as it would confirm this false break reversal pattern. But that level looks miles away from where we are at the moment and the chances are prices may weaken further instead. The bears will be hoping for a decisive daily close below the $91.20/50 area; if that happens we could see WTI drop towards a long-term bullish trend around $88 a barrel over the coming days and weeks