Head of Commodity Strategy
Summary: Trying to make a short-term prediction for crude oil at this stage is close to impossible. Increasingly supportive supply fundamentals have been countered by a deteriorating technical chart setup and the US-China trade related weakness. But with geopolitical and supply risks continuing to build it will take a very brave soul to go outright short the market now.
Supporting crude oil drivers:
– Tightening markets due to voluntary and not least involuntary production cuts.
– This tightness is reflected in the rising backwardation in Brent despite weak prompt prices.
– Russia’s pipeline contamination, cutting supplies to Europe
– Iran’s threat to stop observing restrictions on uranium enrichment
– US moving aircraft carrier to Middle East on credible Iran threat
– Record imports last month from China, the world’s biggest buyer
– Fighting around Tripoli, Libya’s capital, raising risk to supplies from Opec’s most volatile producer
– Risk of failed US-China trade talks prompting a global economic slowdown
– Stock market weakness and surging VIX reducing general risk appetite
– Hedge funds caught on the wrong side following the recent correction
WTI crude oil touched $60/barrel and the bottom of the current channel on Monday. Using Fibonacci retracement levels the next level of support can be found at $57.3/b ahead of $54.5/b.