WTI’s Trapdoor Gives Way, Potential for a Move Down to 46.50 Next?

<p>Drivers around the world are rejoicing as oil extends its recent drop today. After pausing just above the $50.00 level for the early part of […]</p>

Drivers around the world are rejoicing as oil extends its recent drop today. After pausing just above the $50.00 level for the early part of this week, West Texas Intermediate (WTI) crude oil broke down to a new 3-month low on the back of a surprise build in oil inventories yesterday. The weekly US government crude oil inventory report showed that supplies of so-called black gold rose by 2.5M barrels last week, the largest inventory buildup since April and well above the expected 2.3M barrel decrease in inventories. Logically, a larger-than-expected supply of any commodity will reduce its price, all things equal.

The fundamentally-driven selling pressure led to a big technical breakdown, as the chart below shows. WTI sliced through the $50.00 level yesterday, which in addition to representing a key level of psychological support, also marked the 61.8% Fibonacci retracement of the March-May rally. With this key technical level broken, it’s not surprising that prices are trading down another 1.6% so far today.

Looking forward, bulls could make a case for a short-term bounce in WTI based on the oversold RSI indicator, but without any nearby support levels, the current drop could extend down to the 46.50-47.00 range first. The ongoing downtrend in the MACD indicator indicates strong and growing bearish momentum, bolstering the case for more medium-term weakness. Only a recovery back above the key 50 level would put the bearish bias back into question at this point.

The next fundamental catalyst will likely be tomorrow’s Baker Hughes oil rig count data, which fell by 7 to 638 last week after two consecutive rises. If that data shows that the number of US oil rigs is stable or rising, it would be another sign that supply decreases are not keeping up with the drop in demand.

WTI7-23-2015 3-18-46 PMSource: City Index

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