Why does Crude Oil continue to fall, and what’s expected next? Access the DFX Q2 Oil forecast here.

Talking Points:

• Crude Oil Technical Strategy: favoring further downside on close sub-$47.11/bbl
• Commodity Crash and rising global supply causing concern
• Crude Oil Nosedive to 5-Month Lows Discouraging for OPEC
• Option insight showing traders anticipating move below $40/bbl

Long crude is no longer the hot trade, and for obvious reasons. Despite signals from OPEC that production cuts could last well into 2018 with larger production curbs than the first, Crude Oil seems to be without a bid. Recently, we discussed how Oil hedges taken out by US shale producers are allowing for profitable production despite the recent slump in the spot price, which continues to put further pressure on Crude. Friday’s Baker Hughes US RigCount shows that the addition of new active rigs in the US continues with another six added in the first week of May to bring the total US rigs to 703, which is up from 316 a year ago.

The Commitment of Traders report from the CFTC shows that money managers have taken their bets for upside in crude to the lowest levels in 5-months, which was amplified by a near 40% rise in hedge fund short positions. Adding to the liquidation of long-WTI positions was $7 million increase in bearish options (puts) in Crude Oil that would bay out on a break of $39 per Bloomberg by mid-July. Crude’s drop aligns with the larger commodity sell-off that has hit base metals hard and was exacerbated by weak Chinese Data last week. Helping to confirm fears on Monday, Chinese crude imports fell from record highs showing the demand may indeed be slipping.

Looking at the charts, you can see that the $47.11 level we have long been watching broke with a vengeance. We’ll now look for $47.11/bbl to act as price resistance in the move lower, which Ichimoku currently favors to continue. In addition to the increase in hedge fund short positions, it’s worth noting how little impact the news on the likely OPEC extension of the already priced-in six–month cut had on the market. Sometimes, what the market does not do when “good news” hits can tell you a lot, and this may be one of those times, which could be marked as a victory for the bears.

While $47.11 acts a specific resistance, it’s also worth noting that there is a confluence of resistance between $47.50-50/bbl. Therefore, we’ll remain outright bearish below $47.11, and turn neutral on a close above this technical bias filter. However, it would take a close above the zone of confluence at $47.50-540 to go from Neutral to Bullish.

In this scenario where correlated assets are selling off, it’s worth it to keep an eye on Emerging Markets that are tied to oil as well as the Canadian Dollar. If the oil sell-off continues, which would make the $39 put buyers happy, there may also be opportunities lurking in FX that could be related to further Oil downside.

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Crude Oil continues to stay offered below $47.11 as Ichimoku favors downside continuation

Chart Created by Tyler Yell, CMT

Crude Oil Sentiment:

Oil – US Crude: As of May 8, Retail trader data shows 77.4% of traders are net-long with the ratio of traders long to short at 3.43 to 1. In fact, traders have remained net-long since Apr 19 when Oil – US Crude traded near 5301.8; price has moved 11.7% lower since then. The number of traders net-long is 5.2% lower than yesterday and 3.6% lower from last week, while the number of traders net-short is 20.8% lower than yesterday and 5.1% 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: Monday, May 8, 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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