Crude Oil Consolidating: Time To Go Long?

Includes: CRUD
by: Andy Batts

After falling from $110 a barrel up to $81 level, crude oil is now consolidating in a range. That was approximately a 25% drop from the top. After hitting a low at $81.21 initially we saw a rally of $5 earlier in June, supported by hopes for additional stimulus by the Federal Reserve and optimism over a bailout for Spain's troubled banks. But the rally didn't last on concerns about the bailout package's impact on public debt. The upcoming Greek elections on Sunday compounded worries that the crisis in Europe could deepen further.

Top exporter of crude oil Saudi Arabia lifted output sharply to 10 million barrels a day, a 30-year high, to prevent inflated fuel prices impacting global growth and to help offset any disruption in supplies from the Middle East, like Iran. Saudi Arabian Oil Minister Ali al Naimi said on Tuesday that Saudi Arabia intends to keep output levels intact, despite the recent fall in crude oil prices.

Meanwhile the Organization of the Petroleum Exporting Countries (OPEC) will meet tomorrow in Vienna to review the production policy. OPEC is producing above its latest demand forecast. Supply from the 12-member group, running nearly 2 million barrels per day above a self-imposed production ceiling of 30 million bpd, is at its highest since 2008. According to an OPEC monthly report, demand for its oil will remain unchanged at an average of 30.74 million barrels per day in the second half of the year.

"The oversupply will keep going into countries' inventories", said Carsten Fritsch, an oil analyst at Commerzbank, "OPEC is unlikely to reduce production. But the hawks will want to cut, so there is a risk of no common agreement, like last June". However while supply from OPEC is expected to remain steady, North American shale oil projects and production could be curtailed if WTI prices remain weak for a prolonged period. "Some high cost projects are at risk of being put on hold at these prices. There will be no short to medium term impact on current marginal production", said Fritsch at Commerzbank.

Technical View: crude oil Price Nearing Bottom

The chart of crude oil looks very interesting right now with most technical indicators pointing out an extremely oversold situation. Stochastics and Relative Strength Index (RSI) have turned bullish, signaling higher prices are possible from here. I'm expecting to see some more consolidation before a clear direction emerges.

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While technical indicators are signaling bullish outlook, fundamentally there's no trigger visible as of now to support higher prices. This week's price movement will be extremely crucial to forecast the price direction from here. If the current range of $81 on the lower side and $86 on the upper side continues to hold in the later part of the current week and throughout next week, prices may trend higher from July onwards.

If the range breaks down below $81, last October's low at $77.05 is the next downside target. I don't expect crude oil to fall below $75. If that happens a deeper fall should eventually be seen and I'll look for a reversal signal below $75.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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