Crude Oil Looking for A Breakout
Steven Knight | May 26, 2015 08:46PM ET
By Steven Knight, Research Analyst for Blackwell Global
Crude oil has continued to consolidate over the past week with little in the way of a strong trend direction. The commodities price action has seemingly whipsawed around the 59.84 level, leaving some traders awaiting a strong push to jump into. However, things are starting to move for crude, and some ominous signs are indicating that a break-out is likely to happen momentarily.
An analysis of WTI’s H4 Chart (CLN5) shows the commodity forming a wedge pattern, and making lower highs as the pressure builds. The moving averages really tell the story, with a bearish cross between the 6 and 12EMA, as well as price having closed below the 60 period moving average.
In the near term, crude will need to break support at 59.75, the 38.2% Fibonacci level, to confirm a move lower. Any subsequent breach of this zone of support could see the commodity moving lower to test support around the $58.00 range.
However, crude has been difficult to trade of late because there is a definite disconnect between the fundamentals and the derivative prices. Despite rising production and an oversupply in physical crude stocks around the world, the futures prices have continued to consolidate. As we move into the summer driving months, where oil demand is higher in the Northern Hemisphere, markets have been pricing in demand increases that may in fact not materialise. Subsequently, any slackening demand in the near term is likely to see the commodity decline, potentially sharply.
Ultimately, breakouts can be difficult to predict, but with the fundamental case for an oversupply of crude within the market, the bearish side looks the probable move.
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