Crude oil drop could be temporary

After Friday’s unexpectedly sharp rally, a pullback of some sort was always likely, although the magnitude of the drop is somewhat surprising. But with oil prices now at or near key technical support levels we may see the buyers return again at some point this week and take control again.

Oil prices ended an otherwise dull week with a bang on Friday as both contracts surged sharply higher in a short period of time late in the day. There was no news released at the time, which means the upsurge was either a technical move or someone had knowledge of the US oil rig counts data which was published later on in the day, or more likely a combination of the two. Regardless of the reason, Friday’s oil spike ensured that Brent would close the week higher and WTI flat as both contracts recouped sharp losses. However there has been no follow-though in the buying momentum at the start of this week’s trading so far. Quite the opposite in fact as both contracts have fallen more than 2% each at the time of this writing on Monday afternoon. After Friday’s unexpectedly sharp rally, a pullback of some sort was always likely, although the magnitude of the drop is somewhat surprising. But with oil prices now at or near key technical support levels we may see the buyers return again at some point this week and take control again.

Data is turning slightly positive for oil

After all, data is turning slightly positive for oil again. Data from Baker Hughes, for example, revealed that oil rigs fell by 5 in the reporting week, which was the most since January. With rig counts falling again, the growth in US shale oil production may ease off again in the weeks to come. What’s more, US crude oil stocks have been falling consistently in recent weeks. If the downtrend in oil inventories is maintained then a bullish case can be made for oil, especially given the ongoing supply restrictions from the OPEC and Russia. The closure of Libya’s largest oil field due to a pipeline blockade may also lend prices some support in the short term.

Brent stuck around 200-day moving average

Brent oil has now spent a vast amount of time trading either side of its technically-important 200-day moving average. It is a sign of a consolidating market. So far we haven’t seen any clear move away from the moving average to suggest that there is either strong buying or selling pressure coming in. One should be expecting this sort of static volatility until the trend becomes clearer. For day traders this is great but not so much for swing traders. The key short-term support for Brent is between $51.10 and $51.35 area, which is now in sight. Additional support comes in between $49.60 and $50.15. Only if Brent were to break below this region would the trend technical turn bearish. Meanwhile resistance is seen at $52.90, $53.70 and then at $54.65. These resistance levels need to clear if the bulls are going to take control. The weekly hammer candle suggests that the next move could be higher. 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.