Oil is under pressure again in a development which also has implications for other markets
As the daily chart below shows, oil is breaking below support today. While you can never be certain, today's red candle suggests this is not going to be a false break. The latest breakdown follows failure at the 200 day moving average a couple of weeks ago.
Crude Oil West Texas cash daily
Click to enlarge
There have been some modest green shoots for the oil market over the past couple of months. US production has finally started to drop, falling from a peak of around 9.6m barrels a day to around 9.1m. Demand has also improved. The International Energy Administration is forecasting an increase of 1.8m barrels per day this year as buyers respond to cheaper prices.
The problem is that this is not nearly enough. The market still has a supply surplus and US inventory levels remain high. With Iranian production likely to come back onto the market, it could be well into 2017 before the market moves back to balance between supply and demand. If this remains the case, rallies are likely to be capped and oil will remain vulnerable to downside pressure for a while yet.
Following the latest break of support this looks like a market to sell rallies at this stage.
As usual though, it always pays to keep an open mind. While there's a real possibility that oil could fall to new lows from here, that's not guaranteed of course. The Fed and a weaker $US could save the day, as could improved supply statistics. That could still mean that this downswing might turn out to be a correction of the latest rally not the beginning of a major move lower.
In the correction scenario there are a couple of Fibonacci levels that could be worth keeping an eye on. These are outlined on the second chart below. The most interesting looks to be around $40.40 where the 78.6% retracement coincides with the level where the cd swing would be 127% of the ab swing.
Crude oil WTI Cash Daily