U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading higher early Friday after posting its biggest one-day loss for the year the previous session. The price action suggests that yesterday’s steep sell-off may have been overdone, making the markets ripe for a technical rebound. The best upside target at this time is the 200-day moving average. A break of this technical level on Thursday may have triggered a multitude of sell stops that led to the huge decline.
Traders are saying that the sell-off that put the markets in a position to post their biggest weekly loss this year was caused by concerns over rising U.S. stockpiles and worries that the U.S.-China trade standoff has finally hit the U.S. economy.
At this time, supply remains tight because of the impact of the OPEC-led supply cuts. However, the addition of the tensions between Iran and the U.S. actually make the market “fragile”.
One sign of a tight supply is the Brent crude oil futures backwardation. Under these tight market conditions, prices are higher in the nearby futures contracts than in the deferred futures contracts. This is giving traders the incentive to sell oil immediately rather than store it for later sale. Strangely, the backwardation in the forward curve steepened this week despite the steep declines.
With both WTI and Brent crude oil on the weak side of the 200-day moving average at $60.63 and $68.61 respectively, we expect rallies to be short-lived until enough buyers return to drive prices over this technical level.
Furthermore, there is now evidence that the impact of the U.S.-China trade dispute is affecting the U.S. economy. This came to the surface on Thursday with the release of the weaker-than-expected Flash U.S. Manufacturing and Services PMI data. This is raising concerns over lower future demand on top of steadily rising U.S. stockpiles and production.
Additionally, the supply glut has spread outside of the U.S. and is now affecting other countries. According to reports, Asian refinery margins this week fell to their lowest seasonal levels since at least the financial crisis a decade ago, triggering plans for refinery run cuts.
Without a near-term resolution to the ongoing trade dispute between the two economic powerhouses, oil is unlikely to push higher, which likely means the professionals will be selling rallies.