*Live market analysis of the Crude Oil markets and what is next*
Welcome back to the blog! In this post I am going to take a deep dive in to both the technical and fundamental analysis of the crude oil markets and look at recent price action, the key price levels that might come in to play soon and also the data that is moving markets.
Let’s start by revisiting the weekly timeframe price chart. I have marked on, what I believe to be, the major price support and resistance zones.
Since the crude oil crisis in April last year, crude oil has been on a consistently bullish ride upwards. From the lows of around $7bbl for spot contracts (spot = immediate delivery), price has gained over $46 per barrel and that is a gain of more than 650%!
Granted, the crude oil crisis was a bit of a black swan event and the negative futures prices and extremely low spot prices were slightly unjustified, but I do believe that crude oil is now starting to tip towards overvalued once again. I will talk more about the fundamental reasons for this belief later in this blog post.
I have always had the $52bbl price level marked on my crude oil charts because it had remained solid support for price through 2019 and 2020. Last week price had rejected this zone from below and formed a nice bearish wick rejection candle and this has given me confidence that this level could hold strong in the near term.
Also supporting my bearish bias at this area is the weekly trendline shown on the chart above. These are basic technical indicators but when trading higher timeframe charts like the weekly and daily, I believe support and resistance zones and trendlines (also traded as “zones) are highly effective.
Financial market fundamentals.
Let’s look at what moves crude oil prices. As with almost any market, price is determined by supply and demand and I have talked about the principles of supply and demand in previous blog posts. They are the basics of economics and I highly recommend you learn them.
- Demand decrease = price decrease and vice versa.
- Supply increase = price decrease and vice versa.
Crude oil price are often moved by both increases and decreases in supply. However, more recently buyer demand has had a much larger influence on price thanks to global lockdowns eliminating and reducing many industries that have been big users of crude oil products.
The graph below (figure 1) shows the world oil production vs consumption.
As you can see, the effects of the coronavirus pandemic were quite shocking and as a result, demand fell below supply by the largest spread in history. This lead to over supply and the shocking effects on crude oil prices that were seen in April 2020.
In my opinion, demand is still not back at pre-2020 levels yet crude oil is now trading at $53bbl which is actually a higher price than the lows of 2019. Yes, supply of crude oil has been cut but not by enough to warrant these current prices.
You will see on the chart above that towards the end of 2020, consumption began to overtake supply and create a supply deficit once again. This has helped to push prices
One major influence on crude oil prices rising and all commodities and resources is the weakening of the U.S Dollar. The chart below shows the last 5 years of price data for the Bloomberg Dollar Index (BBDXY).
The main reason why changes in USD effects the price of oil and other commodities is because they are all benchmarked and priced in dollars. The dollar is the exchange mechanism for all contracts of crude oil and thus, if dollar weakens then it takes more dollars to purchase a single barrel of oil.
As you can see on the BBDXY above, dollar has been falling in strength against the peak of the coronavirus thanks to continued to stimulus and increased money supply. This links back to the laws of supply and demand that I mentioned for oil earlier. If the supply of dollars increases, price decreases.
However, we are approaching an interesting point for the BBDXY chart and in the last 2 weeks, U.S dollar strength has started to return to the markets. The BBDXY has approached and seemingly bounced off of the lows of 2018 if this continues then I expect it will start to push the price of commodities back down and slow the incredible returns of the last 10 months.
It is not just oil, a weak dollar has pushed corn and wheat prices higher too.
Corn prices are up more than 69% from the lows of 2020.
Wheat prices are up more than 40% from the lows of 2020.
Unfortunately, this is a sign of inflation and what will happen is that these increased prices of natural resources will soon be passed on to the consumer. Purchasing power of dollars is decreasing and it will have a trickle down effect on the U.S economy with households having to spend more on essentials and have less disposable income.
Crude oil price predictions.
A lot can be said as to the accuracy of financial market fundamentals in the last 12 months. Stocks have been soaring despite economies experiencing severe effects of the coronavirus. However, as a trader, investor and financial markets analyst, it is my job to provide potential trading opportunities.
The chart below shows some potential scenarios for crude oil over the next few weeks.
Price has been range bound for the last few days and a breakout of this range will likely dictate the first steps and direction of the next price move. Lower highs have been forming and this gives me a bearish bias for the impending breakout. If this occurs, the the intraday traders who read this should look for the new bearish trend to establish itself before shorting.
A break to the upside will likely lead to a retest of the bearish weekly trendline and if there is enough momentum, that could break to the upside. I can see a large stimulus package and increase dollar supply being the main cause for this as opposed to a large shift in supply or demand for crude oil.
I have marked the above chart with some arrows to suggest the next phases of price movements in either direction. As explained above, a break to the downside should see price head back down to the next support zone at $45bbl. If that level breaks then there is not much to hold price up before $28bbl which would be a big profit for short sellers.
Alternatively, a break to the upside should see that trendline tested and if that fails to hold price down, then $65bbl and the 2020 highs would be a target for bullish traders.
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