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The TA can no longer support higher Oil prices as fundamentals meet worsening sentiment

This goes to show you cannot rely on being a master of one aspect of trading and investing. If you are a technical analyst with a particular viewpoint a fundamental analyst will always have a reason for something happening too. Being aware of all the moving parts and having a holistic view is probably the best way.


Weekly Commodity Analysis – Oil

The Fundamentals


In an uncertain environment, reducing risk is the key to survival and it is this mentality that has driven oil and stocks from levels not seen for a long time back into value areas. Friday's events demonstrated that Coronavirus is still a force to be reckoned with and that vaccinations are imperative to winning this global war against infection and disease, though it is evident the world may not have a silver bullet to cure the disease.


The latest variant's origin in South Africa reminds us that this pandemic is a global problem that requires a global solution and until we are all immune, no one is truly untouchable.

It was a perfect storm of thin-volume markets, high inflation, monetary policy, and health. We had also seen US crude stocks show a build in inventories 7 times out of the last 10 weeks. This to a lot of analysts was suggesting the lack of demand growth in the USA.


Several major consuming nations, such as the US and Asia, have been battling high energy prices, and are seeking ways to reduce some of the price pressures. The high price of oil and gasoline, combined with global supply chain constraints, has led some governments to agree to release oil from strategic reserves. This follows OPEC+'s rejection of requests to increase output from the USA.


The six countries announced last Tuesday they would release around 45 million barrels of oil from strategic stocks to cool rising oil prices and inflation. With the realization that oversupply will dominate 1H 2022, whether SPRs are released or not, Tuesday's rising oil prices and enthusiasm began to fade, and the market started selling the energy complex. This accelerated as the new COVID-19 variant became the 'variant of concern', all while the US stock market was having a long weekend after the Thanksgiving holiday.


A meeting of OPEC+ is scheduled for this week and they will likely suspend the agreed +400kb/d increase for January. A new wave of the pandemic hitting Europe and the US will affect travel restrictions and any production cut will buffer the market from further headwinds to demand. As a result, Brent crude prices would likely remain around $80/bbl for Q1 in 2022. President Biden will have welcomed the reduction in oil prices this week as his feet are firmly up against the fire, and he will be feeling the heat while the American people suffer higher prices for everything.


The reduction in purchasing power is affecting consumer confidence, and most of the electorate believes his administration's policies are contributing to higher inflation. Biden could be hurt politically in the lead up to the mid-term elections and the Build Back Better Act could be put at risk.


It is also uncertain whether OPEC will be able to meet quota increases under the original agreement. Libya, Nigeria, and Angola are among the countries where the undersupply problems are worse and supply constraints are impeding OPEC+'s ability to ramp up production. Based on reported country data for October, OPEC+ quota compliance remained at 116%. There may be a sneaky effort to hold back supply just in case Iran gets the go-ahead to release oil into the wider market on the back of a nuclear deal that Biden is keen to see happen.

Retail Sentiment

For contrarian traders, seeing the ActivTrader sentiment indicator for both the crude and Brent contract shows most traders on the platform are bullish, even though there has been a massive shock to the markets, it is one major reason to go short. The idea is to trim those shorts as the sentiment reading comes back to neutral or the fundamentals start showing supply reduction.

Technicals


Both contracts have broken some major trend lines and market structures, and this is a clear signal that things could be about to get ugly. Brent’s chart shows there is a major trend underneath the current price action, but the double bottom level marked with blue arrows looks very tempting. The WTI trade this month has been about half as damaging as the April 2020 route but is still a substantially large red candle.

The intraday chart for Brent shows that the EMA’s are pointing lower, the swing lows are getting lower as are the swing highs and the CCI indicator is joining in with the sell-off every time it comes under the signal line (0).

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