What’s New?

Brent Crude oil along with WTI continues to plunge, starting off the second week of 2016 with another 5% decline. Brent recently broke down below its 2008 low, leaving many traders wondering how low it could go?

With fundamentals and technical for oil looking so bleak, and so much negativity getting priced into the market, I have to wonder at what point the market reaches a limit and turns back the other way.

Fundamentals:

Crude oil is currently being impacted from concerns on both sides of the market. Trading turmoil in China has stoked fears that its economic troubles could deepen, further dragging on oil demand.

Meanwhile, oversupply fears continue to grow with rising tensions between Saudi Arabia and Iran making it even more difficult to see how OPEC or anybody else is going to be in the mood to co-operate on production levels. It's also possible the two countries could ramp up production in a big to drive down the price and bankrupt their adversaries.

Oil’s political problems have become so dominant that the battle between Saudi Arabia and US shale producers that supposedly sparked the supply war in 2014 has been reduced to a sideshow with falling US inventories and declining US exploration activity being completely ignored and overshadowed .

 

 

Technicals:

 

The monthly chart dating back to 2001 highlights the significant of the recent breakdown below the 2008 low near $36.50 which has kicked off a new downleg for the market.

 

Brent continues to decline, recently taking out $32.00. Next potential downside support levels appear near the $30.00 round number then a previous low near $22.70.

 

That being said, Brent crude is also really oversold on the monthly chart with RSI well below 30. A positive RSI divergence suggests that the current downtrend may be getting exhausted.  This suggests the potential for a significant rebound at some point, the question is what it would take to spark a reversal?