Will Shale production spoil OPEC’s best–laid plans? To see our thoughts, access the DFX Q2 Oil forecast here.

Talking Points:

• Crude Oil Technical Strategy: hanging by a bullish thread above $46/bbl
• Oil rallies fail to hold on fear of shale production spoiling the party
• IGCS Sentiment highlight: combination of current sentiment and recent changes gives us a stronger Oil – US Crude-bearish contrarian trading bias

Crude Oil has fallen despite all the support OPEC has provided to Crude Oil Bulls. Either way, it appears more is needed to prevent buyers from selling and shorts from piling on to the pain. Wednesday will provide traders with the weekly EIA inventory report, which is expected to see the ninth straight fall. A future market occurrence of Contango, where near-term contracts trade above longer-term expiries has narrowed between July August contracts, which could help explain the support found in Oil prices on Tuesday.

A larger concern is that Oil continues to trade below the psychologically important $50-mark, as it has since the OPEC announcement that cuts would be extended into 2018. Much of the weakness in price has been appropriately blamed on US shale production, but a possible drop in inventories on Wednesday could help support price further and help push the market back toward the important $50/bbl level. Regardless of the inventory number, which will affect the front-month futures contract, the EIA US crude output forecast that was released on Tuesday could also raise concerns that oversupply will remain a problem. The EIA forecasted that daily US production would reach 10.01 barrels a day, which surpasses the 1970 record of 9.6m bbl. You can see why the lack of positive economic surprises along with record Oil production is putting a cap on high prices are likely to rise.

When looking at the charts, it’s fair to be optimistic despite the fundamentals. You can see we are in a battle of two channels. A longer-term channel is drawn in red, where price is in the lowerquartile and has previously bounced from and shorter-term channel (blue) that also has found support the lower bound of the longer-term channel. These charts do not predict the future, but a failure for these levels to hold (i.e., a strong price breakdown below $43/bbl) would open up the argument that we’re in the process of a fundamental shift in the Oil market that could mean we’ll soon see a test of $40/bbl. A hold of the zone would open up the argument that we may bounce to back toward $52/bbl where we were in anticipation of the OPEC announcement where traders were buying the rumors to sell the news.

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Crude Oil continues is trading in a zone where we’ve recently seen large bounces

Chart Created by Tyler Yell, CMT

Crude Oil Sentiment:

Oil – US Crude: Retail trader data shows 73.9% of traders are net-long with the ratio of traders long to short at 2.84 to 1. In fact, traders have remained net-long since Apr 19 when Oil – US Crude traded near 5333.7; price has moved 11.4% lower since then. The number of traders net-long is 8.6% higher than yesterday and 54.8% higher from last week, while the number of traders net-short is 13.6% lower than yesterday and 29.2% lower from last week.

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. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Oil – US Crude-bearish contrarian trading bias. (Emphasis Mine)

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Shorter-Term US OIL Technical Levels: Tuesday, June 06, 2017

For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours.

Written by Tyler Yell, CMT, Currency Analyst Trading Instructor for DailyFX.com

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