A Happy New Year to Oil?

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Crude Oil poised to settle near lows of $55 for this year

Crude Oil futures made an attempt last week to break higher but failed, resulting in a continued bearish price action as noted in last week’s Crude Oil analysis. The appearance of the bearish Marubozu candlestick pattern on the weekly timeframe has managed to keep prices low.

Fundamentally, the drop in Crude Oil prices seems to be hurting the biggest player, Saudi Arabia. In its most recent 2015 budget forecast, the country estimates a huge deficit to the tune of $38.6 billion but quickly added that it had the financial reserves to fall back upon. Saudi Arabia has been insistent on continuing to keep production going at current levels, which has hurt many other Oil exporting countries such as Venezuela, Nigeria and Russia. The effect on Russian economy has been particularly harsh considering the sanctions imposed by the West as well. The Ruble has been trading near all time highs against the US Dollar, while the country is slated to enter into a prolonged period of recession.

The drop in Crude oil prices is also likely to hit US Shale oil producers as well as other oil exporters where the cost of extracting Crude Oil is much higher than the current price at which Oil is retailing. These include countries such as Canada which extracts from the Oil sands, a relatively expensive way to drill, as well as the North Atlantic oil drilling operations, affecting the UK and Norway.

new year
Crude Oil Weekly Chart

The weekly charts for Crude oil show a continued decline after last week’s attempt to push higher failed, which resulted in a long legged doji candlestick pattern. If we see a bearish close, preferably below last week’s low of $53.91, we can expect to see a confirmed move to the downside with no respite.

Switching to the H1 time frame, the major line in the sand is the price level at $54.30, which has formed an interim support level. A test to this level cannot be ruled out and price could move either way. A bounce from the $54.3 level could see another attempt to break higher, but gains are likely to be capped by the falling upper resistance trend line from the price channel. Alternatively, if we see a break below the major support, it would indicate a further move to the downside.

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Crude Oil Hourly Chart

The daily chart time frame for Crude oil does not give any conclusive evidence and thus we rely mostly on the Weekly and lower time frame charts. To the downside, the next major support level that is likely to be targeted comes in at $41.7 which marks a major low since November 2008 as shown in the chart below.

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Crude Oil Monthly Chart

However, given the sharp declines in Crude oil, we still anticipate a potential bounce to the upside, towards the levels of $73 – $74 before Crude oil resumes lower, but for the moment, expect to see a lower close at least into the rest of next week.

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