Commodity Spotlight - Oil
We see a possible shorting opportunity arising in the oil markets. Last week oil failed to break resistance, not only that but it ended the week forming a lower high and a lower low. This is a good indication that at least in the short term the oil markets have run out of momentum and there is likely to be a correction in the short term. I’d be expecting a pullback to the uptrend line around 50 dollars, which also has support in the form of the 50 day EMA coming in at 49.20. If we manage to break below this level I’d be looking for a test of the monthly lows at 47.50. Failing to find buyers at this level we will see oil slip quickly to the 200 day EMA at 44 dollars which also would be a retest of previous resistance turned support from the summer highs.
Fundamentally speaking there are a few factors in play that could see the correction bring the price of oil into a value area. First off we have the new covid-19 restrictions being imposed in China just before the Lunar New Year festivities, this could potentially have a big impact on the demand from the worlds largest oil consumer. There was two surprise inventory builds from the US last week showing that once again oil supply is still outpacing the demand and this could see a bearish reversal if this trend continues over the coming weeks. There’s also news that Iraq wasn’t compliant with it’s production quotas in recent months, whilst they have pledged to cut this months production in order to make up for the oversupply, it remains to be seen if Iraq along with many other OPEC+ producers will stick to the production quotas after the Saudis volunteered such a huge cut of 1 million barrels per day. Iran is another country to keep an eye on, with Trump out of office Iran will most likely push their production quotas up in the coming weeks and months. Another development to keep an eye on is the US Shale industry, at these prices it is now profitable to switch on the shale rigs once again, further increasing the supply side of the equation.
All in all this looks like we are setting up for an attractive short trade, with a risk to reward ratio of at least 1:2 up to 1:8, assuming we were to place a short trade at current prices of 52 dollars with a target of 50 to potentially a maximum of 44 dollars and a stop loss set just above 53.