WTI Oil: Fur­ther de­pres­sion in the oil mar­kets

Financial Mirror (Cyprus) - - FRONT PAGE -

The over­whelm­ing sup­ply and de­mand equa­tion that has en­cour­aged dra­matic sell­ing is go­ing nowhere any­time soon, with a per­sis­tent ag­gres­sive over­sup­ply in the mar­kets con­sis­tently haunt­ing in­vestor at­trac­tion, while weaker fore­casts around global growth weighs on de­mand, and it is likely that more global eco­nomic down­grades from ma­jor in­sti­tu­tions are to fol­low early this year.

It has not only be­come in­cred­i­bly dif­fi­cult to ar­gue for a case to buy oil, but also to sim­ply struc­ture a view­point from where prices can re­bound and main­tain them­selves with­out en­ter­ing yet an­other round of sell­ing. The eco­nomic con­di­tions are quite sim­ply so over­whelm­ingly and ag­gres­sively against the com­mod­ity that there is still no vis­i­ble floor for oil weak­ness.

An­other rea­son why it is dif­fi­cult to find a floor de­spite fur­ther ag­gres­sive de­clines which are putting us within touch­ing dis­tance of en­ter­ing the $20 range is be­cause Iran has not yet be­gan to un­leash its own pro­duc­tion po­ten­tial, which would even fur­ther squash the al­ready ag­gres­sive sup­ply and de­mand equa­tion to­wards the mo­men­tum of sellers. Both equity mar­kets and cen­tral banks have still not di­gested such pro­longed weak­ness in the oil mar­kets, and it wouldn’t sur­prise me in the slight­est if cen­tral banks or other pol­i­cy­mak­ers re­sume to change pol­icy tak­ing into ac­count the pro­longed weak­ness in com­modi­ties that are vi­tal to their ex­ports.

Many are won­der­ing how pro­duc­ers can han­dle such de­pressed prices and were ea­gerly await­ing to see if this im­pacts the United States, but traders are now los­ing pa­tience with no cor­re­la­tion yet to be seen be­tween de­clin­ing US oil rigs and the weekly in­ven­tory re­ports re­leased from the United States. Com­ments late last year from Saudi Ara­bia that it would be will­ing to col­lab­o­rate with oth­ers to achieve sta­bil­ity in the mar­kets pro­vided some prom­ise to those hop­ing for a re­bound in sen­ti­ment, but there are con­cerns that the re­cent es­ca­la­tion in political ten­sions be­tween Saudi Ara­bia and Iran will make any com­bined pro­duc­tion cut from ma­jor pro­duc­ers dif­fi­cult. It should also be taken into ac­count how dif­fi­cult it would be to bring lead­ers from so many dif­fer­ent economies around the globe to­gether to col­lec­tively agree on pro­duc­tion lev­els.

Al­though the sit­u­a­tions are en­tirely dif­fer­ent, it was only a few months ago that the head­lines were fo­cused on the Greece sit­u­a­tion and th­ese were col­lec­tive dis­cus­sions be­tween very se­nior fig­ures in the same Euro­pean Union. You would just have to imag­ine how dif­fi­cult it would be to find an agree­ment on a pro­duc­tion ceil­ing for mem­bers of the OPEC com­mit­tee group, let alone find­ing pro­duc­ers out­side of OPEC to join and cut pro­duc­tion also.

In re­gards to the tech­ni­cals, all of the charts paint a de­press­ing pic­ture and show­case how sellers are clearly in con­trol of this mar­ket. Start­ing with the daily time­frame, prices are clearly trad­ing in­side a steep bear­ish chan­nel with $30 act­ing as a ma­jor sup­port level. Bears are clearly in con­trol and as long as prices can con­tinue to trade below $35, a break­down below $30 in­vites a fur­ther po­ten­tial sell­off to­wards $25.

The monthly time­frame also sug­gests that $35 is now a heavy re­sis­tance level and was pre­vi­ously seen as ma­jor sup­port. Pre­vi­ous sup­port at $35 is now go­ing to be seen as ma­jor re­sis­tance, and any fail­ure to close above this level will likely in­vite op­por­tu­ni­ties for in­vestors to en­ter an­other sel­lon rally op­por­tu­nity.

The weekly time­frame also shows that prices are com­press­ing heav­ily to the down­side. Last week’s bear­ish en­gulf­ment com­bined with the fact that prices are below the weekly 50,100 and 200 SMA should en­cour­age a fur­ther sell­off to­wards $30. A weekly close below $30 may sug­gest an­other buildup in bear­ish mo­men­tum which can in­vite sellers to at­tack prices now seen since April 2003 at $25.

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