WTI Crude – 96.2 Key To Determine Direction

Crude Oil collapsed yesterday, falling from a high of 97.02 to a low of 95.06 within the first 4 hours of trading during US session. The biggest portion of the sell-off coincide with the release of the weaker than expected New Home Sales, suggesting that the decline may be inspired by risk-off sentiment. However, it should be noted that WTI prices were climbing back on last Thursday when risk appetite has started to deteriorate. Even Friday’s sharp decline in stock prices failed to faze WTI, with prices managing to stay above the soft support of 96.2. Hence it is a little bit of a stretch to say that yesterday’s decline was a result of “risk off” especially since risk sentiment appears to have improved slightly.

There are other possible explanations given, such as concerns on Obama’s State of Union speech tonight where he may be vocal against the development of Keystone Pipeline in order to push forward his promise of keeping environment degradation in check. Others say that traders are speculating that Crude Stockpiles are rising, but that is more unlikely as official numbers are only released on Wednesday while the private survey done by American Petroleum Institute will only be released at today’s market close. Hence it would really be a tall order for a small number of aggressive speculators to drive prices down on pure rumors alone. There are also pockets of analysts saying that the decline was led by stimulus concern noting that FOMC monetary policy announcement is scheduled on Wednesday. All these diverse views confirmed one thing – nobody knows what is really happening.

Hourly Chart

The only thing that we really know is that prices are pulling back right now, heading towards the 96.2 resistance once more. This is not surprising considering that there is a chance that yesterday’s decline may not be inspired by anything, but merely a short-term pullback after a strong rally since last Wednesday. If that is true, then current decline is not a result of material change of underlying bullish sentiment, and the likelihood of price pushing above 96.2 resistance and possible confluence with descending wedge top increases. Considering that Stochastic readings is currently within Overbought region, if price can indeed push above 96.2, this will be a confirmation of the strong bullish sentiment in WTI Crude which has allowed prices to stay immune against the broad risk off sentiment on Thursday and Friday. As such, we could see a swift return of prices towards recent swing high of 97.7 and potentially beyond.

However, if prices reverse lower from here, then the notion that underlying sentiment is bullish need to be revised. But traders should still strive to find out the reason for the decline in order to ascertain if this sell-off will be able to find bearish follow-through.

Daily Chart

The importance of 96.2 can also be seen from Daily Chart. If 96.2 holds, bearish conviction will be higher as Stochastic indicator is giving us early signs of a bearish cycle signal. Nonetheless, price should preferably trade below 95.0 with Stoch pushing below the previous trough levels of around 71+ in order to affirm stronger bearish sentiment. This is all the more important if traders do not know the underlying reason for the decline.

On the other hand, if prices push above 96.2, we could see a long-term return to previous swing high of 100.0+. But beyond the century mark will be difficult considering that long-term fundamentals favor lower prices as crude production in US is expected to increase, and demand is unlikely to outgrow pace of production growth even at the most optimistic economic growth rates. Given that recent economic numbers have been less than expected, there is a chance that the growth narrative may be overstated, which implies that the supply/demand gap may start to widen again.

More Links:
Gold Technicals – Risk Aversion Preventing Bearish Rout
AUD/USD – Rallies Back to 0.8750
EUR/USD – Steady Below Resistance at 1.37

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