Its Sunday morning, a time for reflection. Gazing out the window, it is a crisp bright morning with bright blue skies and the sun sparkling off the crisp white snow that covers the land and weighs down the branches of the tall spruces. Its been a cold night, -15 degs C, and the squirrels and small birds are busy finding food to give them energy. The forest tracks are spotted with the colourful clothing of the early morning skiers. I am not one of them.
The oil markets put in yet another good show last week, finishing considerably higher than the previous Friday close. But we did not succeed in closing above that weekly 200SMA, running out of steam during Friday afternoon and closing just short of it:
I guess that was not so surprising considering how far we have already travelled back up since the Christmas Eve low. We flirted around just above the $53 range for a while but, with nothing new to provide additional boost, we ran out of new buying and probably met with some profit-taking before the weekend.
I must admit, I was also slightly puzzled in a negative way, with the outcome of the US-China talks. Although there was no great expectation of a list of concrete results, I did expect to hear some specific comments filtering out during the week concerning what topics were handled and what intentions were agreed upon. But there was not really anything more substantial than a few positive, but vague, comments that it all “went well”.
If we add to that the growing drama surrounding Brexit (or no-Brexit) and the parliamentary vote on Tuesday concerning the proposed agreement with the EU - and its highly possible rejection - it is not really surprising that the oil prices closed off their highs.
But if we take a closer look at the daily chart, I think there are some interesting issues here:
The boxes and horizontal red dotted lines highlight a region of around $50-53 that has previously held prices for some time and somehow suggests that this is a region of the real value and balance under present supply/demand conditions. I think this is supported by the speed with which we returned back to this range after the Christmas Eve oversell.
The weekly 200SMA, which we rarely come close to, is running horizontally right through the middle of this range - also suggesting an area of longer-term balance.
The difference between the box pre-Christmas and the box post-Christmas is that the earlier box formed an area of consolidation on the way down and we broke out on downside continuation. The current box, however, was entered from below and we are now approaching the top edge. So do we anticipate a breakout on an upside continuation?
If we look at the core fundamentals, pre-Christmas was a period of falling stocks markets and pessimistic concerns over US-China trade talks and a surplus of oil resulting from the Iran waivers issued by the US to eight big oil importers. But post-Christmas sees the market being supported by cuts in OPEC+ alliance production and their declared aim to bring balance back to the market together with some optimism that the trade talks will produce tangible positive results. We are also facing tighter restrictions on Iran oil exports as the current waivers end in May ( and new orders priors to that).
The one big negative unknown factor at the moment is the Brexit outcome and its impact on British, European and global economic progress.
I do not personally trade Fibonacci levels but a lot of traders do and, because the autumn decline was so far and fast, I have added it here to show the .382 retracement level hanging like a goal line just above this value region - and therefore likely to form an objective if we break through this upper region and above the weekly MA.
I have also left my two ribbon “pipelines” (short term/long term, “light”/“heavy”) visible just to emphasise the entry from below and the current upward momentum. I won’t be turning bearish on this market unless these pipelines start leaking and folding.
Whilst no one knows what the coming week will bring, I think it is clear that the focus is currently more on demand factors ( trade news/economic progress) than supply and reactions will be stronger on trade news items than on inventories. A big negative supply-side factor would be if doubts surface concerning OPEC members’ compliance with their agreement targets and individual quotas.