Originally published by AxiTrader
Traders have lost faith in OPEC's ability to rebalance the oil market over the past month after the cartel failed to announce deeper cuts at its recent meeting and as US inventory levels fell at a slower rate than anticipated.
Last night's bigger than expected draws in both crude and gasoline failed to stem the wave of selling as disappointment builds and bearishness takes hold.
Just one month ago WTI was trading at close to $52 a barrel but this morning it is sitting at just $42.61 a barrel.
That's a loss of more than 18%.
The question now is whether, as some pundits are forecasting, crude falls toward $30 a barrel or whether there is some support looming after such a big fall.
My own view - based on the charts - is that this $42.00 region is crucial to the outlook. If it holds WTI can start to recover. If it breaks a move toward $39 would open up quickly. And, if that breaks, we could see that run into the low $30/$33 region.
I've taken all the trendlines, and Fibonacci levels off the WTI weekly chart and what stands out is how important this $42 region has been for a considerable period of time - two and a half years.
It's been bottoms and tops and if it breaks all heck could break loose.
Earlier this week the Saudi oil minister did a little jawboning to try to lift prices while overnight his Iranian counterpart suggested OPEC might come back with a bigger cut. The problem with this strategy of talking prices higher is that it has suffered diminishing returns now that the cuts are in place, US shale production continues to build, and inventories are not falling as fast as OPEC or oil market bulls thought likely.
As I have written often, it's inventory data that will ultimately drive prices in the next few months as it is the only statistically accurate way to judge OPEC's claims about an oil market rebalance.
In the meantime oil traders are stepping back from the bid as prices drift lower. We might need a pessimistic crescendo - a big fall - before the outlook turns.
$42 a barrel is the level to watch.
Have a great day's trading.
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