From the beginning of October 2018, the price of Brent Oil (BNO) and WTI Crude (OIL) have been in sharp descent which has resulted in them shedding roughly 45% of their value. Thus, the big question investors will have is whether the decline in oil prices has come to an end or not. Hence to establish the most likely scenario, I will look at the fundamental news affecting oil, whilst also analyzing the charts using technical analysis tools.
Oil production agreement:
One of the factors that I believe will provide support to the price of oil in the coming weeks is the recently agreed upon production agreement. This is as the OPEC along with other major crude exporting nations have inked an agreement to reduce production levels so as to stabilise prices, whilst, also curtailing supply. The agreement states that the group will rollback crude production by a whopping 1.2 million barrels per day in the first half of 2019. This level of reduction is in line with analyst estimates as they had pegged the cuts to be between the 1 and 1.4 million barrels per day. Therefore, I believe this will help the bulls maintain the price level in a sideways formation up until some favourable news comes along to support a price rise.
Fall in demand:
The OPEC oil production agreement may provide the bulls with a glimmer of hope. However, I believe it is a false hope as I expect the OPEC nations to suffer some setbacks in 2019. This is as the International Energy Agency has reduced its demand forecast for OPEC oil by a whopping 300,000 barrels per day in 2019. This is in line with the current global economic trend, as the global growth level is expected to reduce from 3.7% to 3.5%. Moreover, I expect the effect of the OPEC oil reduction agreement to be cancelled out as non-OPEC oil supply is expected to grow by 2.16 million barrels per day. This will be positive news for the market bears as it will completely diminish the effect of the reduction undertaken by OPEC nations. Lastly, I believe that American shale will play a large role in deciding the trajectory of oil prices in 2019. I say this as in 2018, the production levels from the Permian Basin and North Dakota were lower due to some glitches. However, in 2019 I expect the glitches to have been resolved which will result in the U.S. oil production level rising above the 12 million barrels per day mark. Thus, if this increase in oil supply were to occur then it will affect any existent bullish strength as it will cause the supply level to surpass the demand level significantly. Therefore, this factor may make 2019 a year in which oil prices take a further hit.
I do not expect 2019 to be that great for oil traders. I say this as the level of American dominance over the oil market is steadily growing which will have a direct impact on the flexibility of global oil production. U.S. shale production utilizes fracking which is extremely flexible in comparison to the large-scale machinery utilized in Russia, Saudi Arabia and other nations. Thus, when the price of oil does rise then more rigs will come active to meet the additional demand which will depress prices once again. Moreover, when the price tumbles then the non-profitable rigs will shut down quickly which will instantly lower supply and raise prices. Hence, I expect this flexibility in U.S. oil production to limit the level of bullishness and bearishness seen in the commodity.
Disruptions in oil supply:
In my opinion there is always room for surprises in the oil market. Thus, I believe it would be foolish of me to overlook the possibility of surprises and the impact they can have on the global oil market. I chose to highlight this as a sizable portion of the world’s black gold still comes from unstable nations.
The first nation I would like to focus on is Venezuela. This is as in 2018, the oil production level from Venezuela fell drastically as its economic and political situation worsened. Thus, I believe if things were to get worse in Venezuela then oil production could halt altogether. This would have a negative bearing on the international oil market as it would result in higher oil prices.
The second group of nations I would like to focus on is Iran and Saudi Arabia. This is as these two regional powers have been fighting a proxy war in Yemen and Syria but have never fought directly. Thus, if a direct conflict were to occur between these two nations then it would cause a steep rise in oil prices. This is as it would lead to a blockade of the Strait of Hormuz which would send prices sharply up. Thus, even though the possibility of this occurring is slim I still believe investors should always keep it in the back of their mind.
India and China:
I have seen a lot of analysts discuss how the American waivers India and China have on Iranian oil could affect the oil market if canceled. This is as analysts have a fear that President Trump may change his mind on the waivers and close the net on Iran which would cause prices to move higher once again. However, I find this to be an irrelevant point. I say this as in the past both the nations have continued to procure Iranian oil even though they were faced with the threat of sanctions. This is as at the end of October Iranian exports were still rising as mentioned in my prior article on 23rdOctober. Thus, even if President Trump were to cancel the waivers; I do not believe this would have an impact as India and China would continue buying Iranian oil. This is as the oil demand in these nations is simply too high. Moreover, Iran would happily offer the oil at a discounted rate which would make it very hard for the Indian and Chinese governments to refuse. Moreover, the Indian government is presently paying for Iranian oil using the Indian rupee, thus, an existence of a waiver will not affect how it pays for Iranian oil. Lastly, Iran’s Chamber of Commerce recently announced that they have resolved the payment issue with China and South Korea by going through other exchanges. Thus, this shows that these nations will not be cutting back on Iranian oil even if President Trump were to cancel the waivers.
The weekly chart of Brent Oil indicates to investors that the commodity will be trading in a box range pattern for the next one to two weeks. Nevertheless, in the coming week investors can expect the overall trend to be positive due to the formation of a ‘Bull Separating line' candle pattern. This candle pattern indicates to investors that the tide of the market has changed from one in which the bears were in control, to one in which the bulls are calling the shots. However, I do not expect this to be a strong bullish rally as there is a long term candle resistance level at $61.41. Therefore, due to this I expect the commodity to rise till that point after which it shall head downwards. Additionally, the 100-day moving average is right above the long term candle resistance level which confirms my notion that a breakout above this level is highly unlikely.
On the price target front, I expect the upper line of the box range pattern to be between the 127.2% and 161.8% fibonacci resistance levels. The 127.2% fibonacci resistance level is at $60.27, whilst, the 161.8% fibonacci resistance level is at $62.52. I do not expect a breakout above this level due to the candle resistance level highlighted earlier, plus due to the 100-day moving average acting as a resistance line. For support, I expect the box range to utilize the range between 38.2% and 50% fibonacci support levels. The 38.2% fibonacci support level is at $53.45, whilst, the 50% fibonacci support level is $49.93. The reason I expect this support level to hold is due to the 50% fibonacci support level also being a long-term candle support line which has been tested numerous times.
The weekly chart of the oil contract hints to traders that the commodity has concluded its downhill descent. However, I do not expect a strong rally as it is presently trading a few points away from a candle resistance level at $52.75. Nevertheless, investors who are interested in scalping the oil market for some profits will be better off trading the WTI oil contract. I say this as the swings inside the box range pattern will be larger in this contract which will cause investors to collect some extra level of profit in comparison to the Brent Oil contract.
On the price target front, I expect the upper line of the box range pattern to be between the 127.2% and 161.8% fibonacci resistance levels. The 127.2% fibonacci resistance level is at $51.45, whilst, the 161.8% fibonacci resistance level is at $53.20. Moreover, for support I expect the box range to utilize the range between the 78.6% and 100% fibonacci support levels. The 78.6% fibonacci support level is at $45.40, whilst, the 100% fibonacci support level is at $43.41.
The big picture:
Overall, I am leaning towards the bulls and bears having a tug of war which will result in WTI Crude and Brent Oil trading in a box range formation. This is driven by the fact that the technicals support a sideways pattern in the commodity. Moreover, I do not expect both the oil contracts to have a strong bullish or bearish breakout as they have been sandwiched between long term candle support and resistance levels.
Good luck trading.
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.