In mid-February, a retest of support near $26.00 completed a double bottom that brought a nine-month downtrend to a close. Since then, crude oil has been on the rebound particularly since a breakout from a classic W base over $34.00 earlier this month.
More recently, however, signs of exhaustion have started to creep in. The RSI has become nearly as overbought as it was when a seasonal rally in oil peaked in May of 2015, and mirrors the oversold conditions that had existed at the bottom a month ago.
Signs of a near-term top also appear to be emerging. Thursday saw a big rally that continued into Friday morning taking WTI up above $40.00. By the end of Friday, however, the price had dropped back under $40.00 which has been retested as resistance Monday. A 3-day Evening star candle pattern appears to be forming which coincides with the bull trap failure above the $40.00 round number suggesting that we may be seeing a buying climax and uptrend exhaustion.
WTI’s advance faltered short of the 62% retracement of the decline from October near $41.30 but remains well short of a 50% retracement of the decline which started in June near $43.50. With Fibonacci support moving up toward $38.30, it appears that a sideways consolidation phase within a staircase pattern to work off overbought conditions may be starting similar to the one we saw earlier in March. Should initial support fail, however, $35.00 could be easily retested in a deeper correction.
There have been two major factors driving the oil rebound of the last month: movement toward an agreement on a production freeze between major OPEC countries and Russia, and signs that lower prices are starting to curtail US shale oil production.
While countries that have been fighting economic, financial and proxy wars against each other is an encouraging step, and has reduced some of the “how low does oil need to go before producers act?” questions we’re still a long way from a deal. Iran still insists that it intends to ramp back up to its pre-sanctions production level of 4 mmbbl/d from the current 3 mmbbl/d and it expects others to make way for its return to market. The planned big meeting has already been pushed off to mid-April from mid-March. Further delays or acrimony could cap the rally.
Similarly, low prices forced US producers to cut exploration spending and shut in wells but if oil continues to advance, US energy companies could decide to bring shut-in production back on stream which also could limit the upside.
Although conditions in the oil industry don’t look quite as dire as they did a month ago, it wouldn’t take much to rain on the recovery parade either so upside could still be limited until the production situation gets sorted out more clearly.