U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading lower on Tuesday, There has been no follow-through to the upside following yesterday’s dramatic rebound rally. This suggests the move was likely fueled by short-covering and some speculative buying tied to the huge recovery in the U.S. equity markets.
There is no question that Monday’s volatile price action was directly tied to U.S.-China trade relations. Early in the session, prices plunged on speculation the trade talks had stalled after President Trump tweeted about new tariffs, and traders bet the Chinese delegation would cancel their appearance in Washington at the end of the week. The major concern for crude oil traders was future demand.
After the selling subsided, crude oil hit bottom yesterday, slightly below the WTI and Brent 200-day moving averages. From a technical perspective, investors came in because this move represented aggressive value buying. The market accelerated to the upside and turned higher for the session after China’s delegation said it would attend the meeting in Washington. This brings hope for a trade deal and perhaps higher demand later in the year.
Fast-Forward to Tuesday…
Buyers haven’t returned to the crude oil market on Tuesday despite yesterday’s potentially bullish chart pattern. This is because renewed doubts over U.S.-China trade talks raised concerns over global growth,
At the same time, prices were underpinned by reports of a U.S. military deployment to the Gulf to deter Iran. U.S. officials announced on Sunday that the movement of the Abraham Lincoln carrier strike group and a bomber task force towards the Middle East was meant to counter “credible threats”, but Tehran dismissed the move as “psychological warfare”.
The mainstays continued to provide support also. These included the OPEC-led supply cuts, and the on-going U.S. sanctions against Venezuela and Iran.
Monday’s price action reaffirms the importance of the 200-day moving average as major support. This level is well-respected by hedge and commodity fund money managers. As long as they continue to be willing to support this level then they will remain patient while waiting for the bullish news to return.
According to Goldman Sachs, “the recent Brent pullback has taken prices too low in the face of tight fundamentals and growing supply risks, just as refiners come back from extended spring turnarounds”.
GS also said, “we therefore expect a near-term Brent rebound”, although it added that “beyond the next couple months…all these supply and demand cross-currents will dissipate to bring a balanced global oil market, once new (U.S.) Permian transport capacity is online and core-OPEC ramps up”.
We tend to agree with this assessment with the U.S.-China trade deal the wildcard. We’re likely to continue to see an upside bias as long as the 200-day moving average holds as support.
For WTI crude oil, the 200-day moving average support is $60.76 and for Brent, the 200-day moving average support is $69.00.