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Market update: oil price outlook - Brent Crude, WTI ease after decent recovery


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China adds further support to the ailing economy; and brent crude oil drops at prior swing low, propped up by the 200 SMA, meanwhile, WTI oil oscillates around key, long-term trend filter.

 

original-size.webpSource: Bloomberg

 

Written by: Richard Snow | Analyst, DailyFX, Johannesburg
 
Publication date: 

China adds further support to the ailing economy

In the early hours of Tuesday morning, it was confirmed that the five-year loan prime rate dropped by more than expected, in yet another show of support for not only the Chinese economy, but for the real estate sector in particular.

Chinese economy is expected to grow by a meager 5% again this year with several concerns still lingering. The real estate sector appears void of confidence especially after a court order to liquidate the large developer, Evergrande and while the rest of the world is battling inflation, China is dealing with the threat of deflation - lower prices year on year.

Nevertheless, the added support did little for oil markets as prices head lower. Concerns around global economic growth persist, as China is a major contributor to oil demand. If doubts around China’s economic recovery persist, this could be seen in a lower oil price.

Brent Crude oil drops at prior swing low, propped up by the 200 SMA

Crude oil prices have put in a phenomenal recovery, rising over 9% from the early February swing low. Price action appears to have found resistance at the $83.50 mark, where prices have since turned lower towards the $82 mark. Cross section may be supported here given that the $82 mark it's followed very closely by the 200-day simple moving average, meaning continued bearish momentum below the long-term trend filter will be required to avoid a period of sideways trading.

The zone highlighted in purple corresponds to the fortunes of the local Chinese stock market, which sold off aggressively, but has since stabilized on the back of state linked investment institutions buying up shares and ETFs in large quantities to restore confidence in the market.

However, $83.50 remains as immediate resistance with the RSI turning lower before reaching overbought levels. Immediate support is at $82.00 followed by the 200 SMA.

Brent Crude oil (UK oil) daily chart

 

original-size.webpSource: TradingView

WTI oil oscillates around key long-term trend filter

WTI crude oil is lower on Tuesday and tests a very key level comprised of the 200-day simple moving average, and the long-term level of significance at $77.40. Over the more medium-term, price action trades higher, within an ascending channel, marking a series of higher highs and higher lows.

Should we see further bearish momentum from here, oil prices may look to test the 50-day simple moving average down at the $73.84 mark before potentially making another test of channel support. Oil prices continue to react to global growth prospects which appear to have worsened given that the UK and Japan have already confirmed recessions. In addition, Europe's largest economy, Germany, is said to already be in a recession according to the Bundesbank.

WTI crude daily chart

 

original-size.webpSource: TradingView

IG client sentiment reveals narrowing of shorts and longs, distorting signals

  • Oil-US crude: retail trader data shows 63.69% of traders are net-long, with the ratio of traders long to short at 1.75 to 1.
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests oil-US crude prices may continue to fall.
  • Positioning is more net-long than yesterday, but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed oil-US crude trading bias.

Oil-US crude client positioning chart

 

original-size.webpSource: DailyFX

 

 

 

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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