Originally published by AxiTrader
Key Takeaway
Crude oil benchmarks collapsed more than 5% overnight.
That appears to be after a number of factors combined into a perfect storm for crude.
The EIA reported another much bigger than expected build in inventories - 8.2 million versus 1.66 expected. We have an extremely long market. There was a breach of a 3-month trendline. And the changed tone in the overall discussion about the future oil prices all combined to see demand evaporate.
WTI prices are now at the bottom of the $5 dollar range we've seen for the past 3 months or so. But the risk is lower prices to test the support line which harkens back to the lows of 2016.
What You Need To Know
Earlier this week I wrote a piece wondering "are the oil market's bulls finally running out of puff?" I won't reprise that note other than to say the massive builds in open interest and net speculative longs is both a key source of the big fall last night and a possible driver of further instability.
Instead let's focus on what the Kuwaiti oil minister said last night and how it fits with what his counterpart from Saudi Arabia said the night before last.
As I noted recently the chatter about extending the production cut suggested that the OPEC/non-OPEC deal was taking longer to bite than I sense the Saudi’s would have wanted. That’s especially important because while OPEC’s compliance is 140% in February according to Kuwaiti oil minister Essam Al-Marzouq he said non-OPEC was languishing at 50-60%.
But the really important point he made – one that Saudi oil minister Al-Falih pointed out the other day – is that it’s because of the Saudis deep cuts, much more than they agreed to undertake, that there is any compliance at all. Al-Falih warned against other countries free-riding on the OPEC – its – deal.
So as I warned when the January numbers were released, this is really all a Saudi-engineered and driven deal so if they lose patience oil all bets will be off for the bulls.
Now I don't expect that to happen - the Saudis are selling part Aramco via an IPO soon and will want to maximise the value of the kingdom's asset. But if folks in the oil game get a sense that this is the only reason the Saudis are playing ball they will quickly discount the production cut and current prices.
Throw in another cut in demand growth - like we saw from the EIA Tuesday night - and the price dynamic around supply and demand materially change.
But let's not get too bearish just yet.
WTI is close to, but hasn't yet broken, the bottom of the range oil has been trading in over recent months between $50.00/$50.50 and $55.00/$55.50.
It's extremely vulnerable given all of the above. But it is a little oversold in the very short term. There is every chance though that traders will want to test the level of support below $50 at some point soon
And even though OPEC has proven itself a great jawboner of price over the past year there is every chance traders will want to test the level of support below $50 at some point soon.
That makes the $48.70 region very important. It's both the uptrend line from last years lows and also the 50% reteacement of the most recent upmove.
Here's the chart:
This is only a tentative line as it has only had two touches. But teh McKenna Mantra is to always repect trendlines and levels unless or until they break. So I'll be doing that again on this one.
Have a great day's trading.