Crude Oil, possible bottom at $41.70 – $41.50 but beware of a corrective rally
Crude Oil futures was the major talk across the various news outlets this week as the commodity, often referred to as the ‘Black Gold’ broke below the $45 psychological handle. Crude Oil futures hit a new low this week, dipping briefly to 44.76 before managing to stabilize from the fresh multi year lows.
Saudi Arabia, the largest OPEC producer continued to put pressure on the prices after reiterating that there would be no production cuts. Recent comments from the Arabian Peninsula on the Crude Oil price declines only helped to alleviate the decline. Most recently, UAE energy minister Suhail al-Mazrouei stated that the region would not cut production while a Saudi businessman with deep ties to the Oil industry was quoted as saying that Oil would never again see the $100 price.
The main player in Crude Oil production, Saudi Arabia’s stance is being seen as a master plan to shake out the US shale oil production, which managed to gain a considerable market share, primarily riding on the higher oil prices. Ever since Crude oil started its declines, the shale oil industry has been bearing the brunt. With production costs for shale oil relatively higher than traditional drilling methods, the shale industry is already feeling the effects.
Baker Hughes, which releases its weekly census of the number of drilling rigs that are either exploring or developing oil or natural gas fields in the US, saw a record number of declines in the Oil rigs, a sign that the shale oil producers are feeling the heat of the falling prices.
Besides the industrial sector which has been hit by the falling prices, politically too, countries, especially the next exporters are bracing themselves for what could possibly be the ‘New Normal’ in the oil industry. Russia, seems to have understood this fact as the country decided to shore up oil production, while Venezuela, an OPEC founding member, which has been the worst hit has been trying hard as the Venezuelan President, Nicolas Maduro embarked on a trip to Saudi Arabia. It is anyone’s guess as to what the President spoke about.
Crude Oil Technical Analysis
The updated monthly chart for Crude oil continues to show the sharp decline in prices as we head closer to the major support level of $41.69. Any rallies that could potentially crop up, is most likely to be a correction as the downside pressure continues to persist. Most importantly, the monthly candlestick charts (for December) closed bearish indicating a continuation of the declines in prices. The only clear price point that we see on the charts is the broken support near 74.5 – 71.75 region, which should could possibly be the target region for any corrections in the longer term.
Looking to the smaller time frames, yesterday, Crude Oil closed on a modestly bullish note after dipping to the lows of 44.76. Today’s price action is looking bearish so far. However if prices do not fall below 44.76, we could potentially see a minor short term rally, but there isn’t much to get excited about as upside gains will likely struggle to break above 47.81 – 47.32. In the unlikely event of a move above this immediate support/resistance level, Crude could potentially target the next support at 49.69 – 50, which could indicate a healthy retracement before resuming its downtrend.