Chapter 6 04/19 WTI: There Are Opportunities for Both Bulls and Bears, But the Least Risky Option Is Downside
Abstract: Oil prices fell after a fourth straight week of gains as a rise in the USD and headwinds in demand offset the IEA's warning of future price rises.
Fundamentals
On Wednesday, WTI crude oil fell for the second day in a row, widening its decline from the top of US$83.51. The new weakness stems from continuing concerns about further increases in U.S. interest rates and gloomy growth prospects. China's Q1 economic data were much stronger than expected and were not enough to improve recent negative sentiment.
Meanwhile, investors continue to focus on the U.S. The U.S. economy was shaken by the collapse of two banks and was not entirely convinced that the worst was over. In addition, monetary policy is likely to tighten further, and tighter credit conditions will further weaken economic growth. According to the latest U.S. economic data, economic growth remains fragile.
WTI crude fell sharply during the day, narrowing the bullish gap of the previous week. A further sign of pressure on oil prices is that Iraq is preparing to resume crude exports that it halted last month.
The sharp drop in oil prices also offset the IEA's warning of future price rises. IEA warned on Friday that the unexpected cut in production announced by OPEC earlier this month would lead to painful price rises for consumers, and that supply restrictions starting in May should further tighten the outlook for the second half of the year.
The drop in oil prices may also attract more buying interest. American Petroleum Institute reported that U.S. inventories fell 2.675 million barrels in the week ended April 14. This indicates that demand is still growing strongly despite the weak supply conditions. Therefore, a similar situation may occur in the forthcoming EIA report on oil inventories, which may lead to an increase in crude oil prices in the next few days.
This week's catalyst-induced risk appetite could also affect the direction of crude oil, as an increase in risk exposure could mean there is still room for commodity prices to move upwards. On the other hand, the returns from safe-haven flows may spur losses on high-yield assets.
Finally, the technical indicators still point to more upward space because 100 SMA is above 200 SMA to reflect upward momentum. However, crude oil has closed below the 200 SMA dynamic support and the gap between SMAs is narrowing.
However, stochastics are already in the oversold zone, so bullish pressure could emerge as the bears temporarily halt their decline. The RSI is also near the oversold zone to reflect bear exhaustion, so a move higher could spur bullish momentum back up.
If so, oil bulls may continue to climb to fill the gap back to the US$82-83 range, or all the way up to the latest high of US$83.50.
On the other hand, the continued bearish momentum may cause the oil price to fall back to the previous supporting zone of US$79.45 per barrel.
Technical Analysis
Judging from the 1D timeframe, WTI crude oil is still in the overall bullish trend, but the loss of bullish momentum in the short term indicates that the recent trend may be at a disadvantage for some time to come.
So far, the psychological support level of US$78.00-$79.00 has faced strong resistance, which is the upper limit of the key support area between US$78.00 and US$79.00 (the latter marks the 23.6% Fibonacci retracement, which rebounded from US$64.34-$83.51, and the low at the opening on April 3, when the market was nearly US$5 higher). When prices remain above these levels, the bullish structure is expected to remain unchanged, but deeper declines cannot be ruled out, depending largely on fundamentals.
However, the gap that the opening price was higher than yesterday's highest price has not been filled up so far, which means that attention should be given to the downside in the later period. Bulls must be careful with this. It is recommended to go short at the highs.
Trading Recommendations
Trading direction: Short
Entry price: 79.94
Target price: 75.00
Stop loss: 87.00
Deadline: 2022-05-03 23:55:00
Support: 80.00, 79.35, 78.98, 78.14
Resistance: 81.31, 81.98, 82.75, 83.51
