Chương 18 05/02 WTI: Despite Weak Prices, Further Declines Are Still Limited
Abstract: Oil prices continued their two-week decline after data from China renewed concerns about a sluggish recovery in the world's largest oil importer.
Fundamentals
Crude oil prices opened lower this week after data released on Sunday showed an unexpected contraction in manufacturing activity in China. WTI crude oil extended Monday's accelerated drop in trading on Tuesday.
Meanwhile, JPMorgan Chase's acquisition of the first bank on Monday in an emergency intervention led by the U.S. government has once again raised concerns about the stability of the banking sector and the country's overall economic health.
Nevertheless, although the overall economic situation looks a bit weak, the real fundamentals of crude oil are still positive.
Oil prices surged to a 15-month high in April after the Organization of Petroleum Exporting Countries (OPEC) and its allies announced production cuts, but abandoned those gains amid deteriorating prospects. For the time being, hedge funds and funds' views on crude oil have turned seriously bearish.
In early April, after OPEC+ unexpectedly cut quotas over the weekend, the market narrowed the gap by 7% to cover the shortfall and crude oil price volatility decreased. The current level of about US$70.00 is also at the bottom of the December-March trading range.
The drop in oil prices accelerated in the first half of March and was only supported near US$64 as markets began to digest the Fed's expectations of a rate cut. OPEC+ quota cuts and Russia's voluntary production cuts pushed oil prices up to US$83 by mid-month.
The 200-day SMA was the key resistance level in the second half of April. Oil prices have failed to break this line and remain in a bearish trend. Early in the week, crude oil prices plunged below the 50-day SMA. The movement near the key SMA proves that the market is still bearish.
The US$65.00-US$67.00 range appears to be an attractive target for bears. Since 2021, there have been many supporting points. Before that, the resistance in 2019 was relatively high. Nevertheless, bears should remain cautious, as a continued fall in prices will almost certainly draw OPEC's attention. In contrast, the next notable target is the key US$80.00 threshold.
Technical Analysis
On Tuesday, WTI crude oil prices continued to fall near US$75.50 in the Asia session, ending two consecutive days of gains, during which the crude oil price continued the trend of reversal from the 100-day SMA and the downward trend since mid-April.
Considering the bearish MACD signal and the stable RSI, oil bulls may again try to break the 50% Fibonacci retracement from the March-April upward trend, approaching US$73.90. However, multi-level support of US$72.50 since early January seems to be a tough issue for bears.
Similarly, the 61.8% Fibonacci retracement level near US$71.60 also acts as short-term key support, and a break of this level could take the price back to US$69.00.
Conversely, holding the above support line would reverse the price of crude oil back up. After that, the 100-day SMA and 23.6% Fibonacci retracement could continue higher around US$77.00 and US$79.00. If subsequent buying holds firm, the psychological price of US$80.00 will be the last line of defense for crude shorts.
Overall, WTI crude is weak intraday and is expected to fall further, but the downside remains limited unless it closes below US$72.50. It is recommended to buy at the lows.
Trading Recommendations
Trading direction: Long
Entry price: 70.50
Target price: 80.00
Stop loss: 65.40
Deadline: 2022-05-16 23:55:00
Support: 71.63, 69.62, 66.82
Resistance: 76.07, 79.15, 81.33
