{x} | Trading.live

Summary: WTI crude oil was sharply lower on Monday as investors tried to assess the Fed's willingness to raise interest rates further, while concerns about reduced energy demand and increased supplies of Russian crude oil weighed on the market.

Fundamentals

WTI crude oil was sharply lower on Monday, falling nearly 3% to a two-week low, as investors became increasingly concerned about new crude oil supplies in the global market amid a slowing economy and still-weak global demand.

Chevron continues to increase oil production in Venezuela after receiving approval from the U.S. government last November, while Russian production remains high despite the sanctions it faces. In addition, as the U.S. continues to negotiate a nuclear deal with Iran, the latter is now seen as a potential source of new oil exports.

Meanwhile, lower commodity prices such as crude oil are being dragged down by a stronger U.S. dollar, as investors appear to be digesting the possibility of another Fed rate hike during this week's Federal Open Market Committee statement.

A strong headline number may be enough to increase the likelihood of higher borrowing costs, as the U.S. inflation report for May is due out this Tuesday. Recall that the May non-farm payroll data again exceeded expectations, providing the Fed with room for policy tightening.

Furthermore, crude oil could take a cue from this week's API and EIA inventory data, where another decrease in inventories could mean higher crude oil prices. On the other hand, an increase in inventories could indicate sluggish buying interest or persistently high supply levels. However, it is worth noting that OPEC+ has announced voluntary production cuts, which could translate into lower global supply levels.

Goldman Sachs, one of the previously most bullish investment banks in terms of oil price outlook, has once again cut its oil price forecasts for both Brent and WTI crude oil amid increasing global supply and weakening demand.

The bank lowered its December Brent crude oil price estimate to $86.00 per barrel, down from its previous estimate of $95 per barrel, and lowered its WTI crude oil price estimate to $81.00 per barrel from $89.00 per barrel. This is the third time Goldman Sachs has lowered its estimate in the past six months after sticking to its $100.00 per barrel estimate.

On Friday, the August contract for Brent crude closed at $74.79 per barrel. Jeff Currie, global head of commodities research at Goldman Sachs, said they have never been wrong for so long. The bank attributes the downward pressure on price prospects to increased supply from sanctioned countries, namely Russia, Iran, and Venezuela.

Oil prices are currently caught in a tug-of-war between two opposing forces: the pessimistic asset allocators, who say monetary policy will tighten, and the optimistic crude oil speculators, who expect inventories to fall in the second half of the year. We believe it will be difficult for oil prices to rally until the Fed eases monetary policy; hence, the bears will hold the upper hand for now.

Technical Analysis

WTI Crude Oil (short) is forming a new downtrend channel in the hourly time frame and accelerating lower. The bears are now looking at support around $65.00 per barrel.

However, technical indicators suggest that a rally is coming. On the one hand, the 100 SMA is above the 200 SMA, indicating bullish pressure and a higher likelihood for support to hold rather than being breached. However, it should be noted that the current trading price of oil is below these two indicators, so they may act as dynamic resistance levels for any potential rebound.

Meanwhile, the stochastic oscillator has been reflecting oversold conditions for some time, so a move higher would signal a possible return of bullish pressure. Crude oil bulls still have enough upside until they reach the overbought zone, allowing them to maintain control in the short term.

But considering the overall market environment, it is not opportune to try to bottom fish at the current price, and the time frame is too crowded. This indicates that there is further downside potential for the bears. In terms of strategy, it is recommended to buy the dips.

Trading Recommendations

Trading Direction: Long

Entry Price: 65.30

Target Price: 71.00

Stop Loss: 61.50

Valid Until: 2022-06-26 23:55:00

Support: 67.06, 64.01, 62.34

Resistance: 69.64, 70.08, 71.87