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Analysis

A potential further down of oil price (WTI)

Crude oil

Oil prices fall on news that OPEC may cut Russia out of the output alliance amid an EU ban on Russia’s 90% exports, which could cause Russia to substantially reduce its oil production. According to Financial Times, Saudi Arabia indicated raising output to compensate supply shortage in Russia. The OPEC + will meet later today to discuss the joint output plan for next month. Traders took profit on the recent price rally and expect a potential material impact on the oil markets if the alliance confirms an output increase.

Chart 1 – Crude Oil Texas – Cash, Daily (CMC Markets NG)

(Click to see the enlarged chart)

From the above chart, oil retreated from the recent high at above 120, falling off the channel resistance, and heading to the 20-day MA at around 110.40 -111.36. The bearish fundamental factor may continue to send the oil price even lower to test further pivotal support at 107.17, the 50-day MA, also the long-term ascending trendline support. The short-term day resistance is at the 10-day MA, around 114.50. But we cannot confirm a major bearish breakout to the long-term descending trendline just yet, it all depends on how the macro picture plays out.  

Chart -2 COMB WTI Futures (Black line) vs. SPX Index (Blue Line) vs. US CPI YOY Index (Red Line) 1 year

Source: Bloomberg (Click to see the enlarged chart)

Oil price plays a major role in the global inflation story, sending US CPI to a 41-year high at 8.5% in March but moderated since. From the correlation among the three data (YTD trend), the US CPI may continue to elevate in May but is most likely to support a peaking inflation theory, which will be released on Friday next week. The S&P 500 is now testing the descending trendline at 4,160, suggesting it may have a major bullish breakout if oil price substantially falls. From the short-term technical perspective, if S&P 500 can close above 4,100 tonight, the directional bias will pro the upside and support a medium-term rebounding of the index, to the next resistance at 4,300.

 


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