Chart of the Week December 14th Crude Oil West Texas

Crude oil is testing $35.00 its 2008 low with signals mixed as to whether that level may hold or not.

What’s Changing?

WTI and Brent Crude oil have been under pressure in recent weeks. The latest  selloff was sparked by OPEC deciding not to issue a production quota at its last meeting, increasing concerns that oversupply in the oil market and the market share war among suppliers could continue into 2016 and beyond, potentially keeping prices depressed for years to come.

WTI crude oil has now reached a key technical test, the 2008 low near $35.00/bbl. Whether this level holds or not could indicate if the selloff is contained for now or if we could see oil continue to trend lower possibly into the $20-$30 range before it is finally washed out.  


Technicals:

The monthly chart dating back to 2001 shows the significance of the current test of $35.00. Should this level fail, next potential support levels don’t appear until $33.00 an old resistance level, the $30.00 round number and $25.75 prior support dating back into the 2001-2003 time frame.

The RSI has become oversold again, and a big positive divergence has emerged suggesting that downward pressure may be peaking and the market could be getting washed out and ready for a rebound.

Because it has become oversold a snapback rally could be quick and sharp, but the big question is what would it take to spark one?

On Monday December 14th, WTI has dipped under $35.00 and has moved back up into positive territory a potential key reversal combined with a bear trap and a hammer candle. This could be a sign of a washout.

Should crude oil rebound, initial resistance could appears near $38.25 then near $40.65 based on Fibonacci retracements of the declines from peaks in June and October.  


Fundamentals:

Crude oil has been declining for over a year with OPEC, led by Saudi Arabia refusing to cut production to prop the price, preferring instead to defend their market share.
Heading into 2016, the demand side appears to be improving, but the supply side remains problematic.
    
Signs that the demand for oil could increase in 2016 include:

               Economic reports for the Eurozone and China suggest stimulus is helping
        
                US inventories have been falling and demand improving in recent weeks

    Signs that oversupply in the oil market is likely to continue through 2016 include:

               Iran ramping up production as it prepares to return to the world market with sanctions expected to come off in January 2016

               Reports suggest that Saudi Arabia is looking at steep government funding cuts to bring its budget closer to balance in 2016    (In         2015,       the shortfall was apparently funded by Saudi sovereign wealth funds selling investments). This suggests the Saudis plan to    keep prices low for a long time yet.  

        The United States is preparing to lift a 40 year ban on oil exports.