The current situation on the oil market, apparently, is a rare case when the technical and the fundamental analyses converge in their results.
I'll start with the fundamental aspects. In the last article I gave the statistical rationale of the balanced oil price at the level of $ 40 per barrel. The analysis was focused on the global balance of supply and demand indicators. Moreover, the analysis of the situation specifically in the United States confirmed the results.
The best oil market indicator, which simultaneously reflects the mutual ratio of supply and demand, is the number of days during which the possible satisfaction of domestic oil needs solely through the ending stocks is possible. In order to get away from the influence of the dollar value on the oil price in the United States, I use the product of WTI price per barrel and the U.S. Dollar Index as the oil price indicator. I.e. WTI oil price per barrel translates into values of six key foreign currencies, used to determine the U.S. Dollar Index value.
The results are presented in the following diagram:
The interpretation is the following: the U.S. Dollar Index value, equal to 96 p. under the current ratio of domestic consumption and ending stocks of oil involves the WTI oil price at a level of $ 42 per barrel. It is worth mentioning that the current, actual oil price has been diverted from the sustainable level almost at a distance of one standard deviation, i.e. price is inflated over the natural volatility.
The technical analysis is even more specific. Since April, the WTI oil price was moving in a well identified channel. On June 6 this channel was destroyed, upon which the market entered a consolidation phase, forming a triangle. The MACD indicator gave the sell signal on June 8 and has remained in a negative mode since then. In the case of two consecutive trading sessions, closed below the support level of the specified triangle, the price at the level of $ 42 per barrel will be the most likely next target for WTI.
The money managers' behavior is not less characteristic. This year, the money managers' net long position on oil in the NYMEX peaked on April 19, reaching 249 123 purchased contracts. According to the COT, as of 28 June the net position of the money managers reduced to 179 430 purchased contracts, i.e. by 27.9%.
Source: Saxo Group
Turning to the proposed statistical model, I'd like to note that the oil price has been surpassing the balanced level over the period of three months. This was contributed by the disruption of the oil production in Canada and Nigeria, as well as the strong belief in the growth of global oil consumption.
Now the situation has changed. Firstly, it is projected that the oil production in the regions of Canada, affected by the fires, will reach the standard level by September, and the situation in Nigeria at least is not worsening. Secondly, the results of the referendum in the UK should, as a minimum, question the stability of the future global economic growth and the demand for oil. It is appropriate at this point to mention the forecast of JPMorgan Chase & Co., according to which China is extremely close to filling its strategic oil reserves. The doubts about the stability of the Chinese demand could put stronger pressure on the market than any Brexit.
The price of oil, like any other resource, rarely remains balanced. On the other hand, it cannot stay unbalanced over a long period of time. I am of the opinion that the oil market correction is possible in the medium term.
Unless otherwise noted, all charts included are my own.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.