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Jim Hyerczyk

Jim Hyerczyk

Fundamental and technical analyst with 30 years experience.

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Crude Rally On Hold

U.S. West Texas Intermediate crude oil futures are trading higher on Friday, however, the market is still in a position to close lower for the week. The market opened on its high this week, but sellers came in quickly to stop the move, producing a potentially bearish closing price reversal top in the process.  

The selling was primarily driven by two factors:  worries over a global economic slowdown and renewed concerns over U.S.-China relations. Underpinning the market were the OPEC-led supply cuts and political turmoil in Venezuela, which could lead to a supply disruption.

Global Economic Slowdown Caps Gains

The wave of selling pressure shortly after the opening this week was fueled by China’s weak GDP data and a report from the International Monetary Fund (IMF) that forecast a slowdown in the global economy in 2019 and 2020.

The theme throughout the week was the weakening global economy which translates into lower demand for crude oil. Supporting this idea were remarks from a couple of central banks this week to go along with previous central bank concerns about an economic slowdown.

The U.S. Federal Reserve is already on record saying it would be willing to take a pause in rate hikes if the economy continues to sputter. On Wednesday, the Bank of Japan kept its ultra-loose monetary policy unchanged. It also cut its inflation forecasts and warned of growing risks to the economy from trade protectionism and slowing global demand. On Thursday, the European Central Bank left interest rates unchanged and ECB President Mario Draghi made dovish remarks about the weakening Euro Zone economy. Additionally, the People’s Bank of China has already come forward with its own plan for stimulus in an attempt to counteract the negative effects of the U.S.-China trade dispute.

Despite the worries over the slowdown and its potential effect on future demand, the focus shifted to supply on Friday in reaction to political and economic turmoil in Venezuela. Concerns over a supply disruption were enough to attract speculative buyers and fuel some short-covering, but not worrisome enough to take out the high of the week that was established on Monday.

Crude Oil Rally on Hold

The central bank concerns are being primarily fed by worries over U.S.-China trade relations. They took a hit this week after a report from the Financial Times, which was confirmed by CNBC sources, said the high-level meeting between the U.S. and China, scheduled for later this month, had been cancelled by United States officials. The report went on to say that the reason for the cancellation was due to the lack of progress in a discussion on forced technology transfers and structural reforms to China’s economy.

Both U.S. and Chinese officials denied this report, but it essentially created enough uncertainty to stall the rally in crude oil.

Later in the week, U.S. Secretary of Commerce Wilbur Ross created even more uncertainty when he said that the two economic powerhouses still have long way to go before they can resolve a months-long tariff dispute.

“We would like to make a deal but it has to be a deal that will work for both parties,” Ross told CNBC. “We’re miles and miles from getting a resolution.”

Ross further added that the Trump administration would need to impose “structural reforms” and “penalties” before Washington could resume normal trade relations with Beijing.

Conclusion

The reaction to the news in Venezuela may be supporting crude oil late in the week, but this is likely to be a short-term move. The real issue that could drive crude oil prices lower over the long-run is weak demand due to the slowing global economy. This is the issue that crude traders will likely be focusing on next week when the U.S. and China hold high level talks in Washington on January 30-31. So if we are going to see volatility next week, it is likely to correspond with these dates.

Bullish traders will be hoping for positive developments to extend the rally. However, if the talks don’t produce enough positive developments then prices could fall sharply since traders will start to price in the possibility that both economic powerhouses will be unable to reach a deal before the March 1 deadline. That likely means five weeks of uncertainty, and this usually brings in the sellers.

Technical Analysis

Weekly March West Texas Intermediate Crude Oil Technical Analysis

The main trend is down according to the weekly swing chart. The market has made some headway over the last four weeks, but buyers haven’t taken out any significant levels to get excited about this rally. This suggests that crude oil may still be going through the short-covering phase of a longer-term rally. Furthermore, we haven’t even seen a test of the low so we still can’t be sure that a bottom has been formed.

The minor trend is also down. It will change to up when buyers take out $54.98. This will also shift momentum to the upside.

The main range is $76.29 to $42.67. If the minor trend changes to up then look for the rally to possibly extend into its 50% to 61.8% retracement zone at $59.48 to $63.45 over the near-term.

If the rally stalls and $54.32 becomes a short-term top then look for the start of another move to the downside. If this move creates enough downside momentum then March WTI crude oil could break further into its 50% to 61.8% retracement zone at $48.50 to $47.12.

The direction and the volatility next week will be fueled by the U.S-China meetings on January 30-31.

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  • Mamdouh Salameh on January 27 2019 said:
    Despite claims about a slowdown in the global economy, there is no sign yet to substantiate such claims. The fundamentals of the global economy are still robust in terms of a global economy projected to grow this year at a healthy 3.5%, global oil demand adding 1.4 million barrels a day (mbd) over 2018 and rising Chinese crude oil imports. Moreover, the OPEC+ production cuts are starting to permeate the global oil market and impact on prices. Saudi Arabia and OPEC are determined to ensure that the cuts will do the trick and reduce the glut in the market. These fundamentals could sustain an oil price higher than $80 a barrel.

    Talk about China’s economy slowing down is based on fickle and unsubstantiated premises. China’s GDP grew in 2018 at a very healthy rate of 6.6% exactly as it was projected at the start of 2018 and is also projected to grow at a similar rate this year.

    Moreover, China’s oil imports rose in 2018 by more than 24% from 8.43 million barrels a day (mbd) in 2017 to 10.43 mbd and are projected to hit 11 mbd this year. This is not a sign of slowing down economy. Furthermore, China’s economy is now a mature economy so it is not expected to continue growing at a range of 9%-12% as was the case in the 1990s and the first decade of the 21st century. Still, an annualized growth of 6.6% for the world’s largest economy based on purchasing power parity (PPP) is an astounding growth when compared with a 2.5%-3.00% for the United States and 2% for the European Union (EU).

    There are indications that both the United States and China are wanting an end to the trade war between them. President Trump has at last realized that the trade war was hurting the US economy far more than China’s since the Chinese economy is bigger and far more integrated in the global trade system than the United States’.

    The recent events in Venezuela will hardly impact oil prices unless the country’s oil production which has been in steady decline for a while collapses completely as a result of a full-scale strike in PDVSA or a civil war in the country. However, China and Russia who between them are owed more than $30 bn worth of investment will do everything possible to prevent a collapse of Venezuela’s economy.

    One bullish factor will, however, be at play in 2019, namely the numerous and very reliable reports coming thick and fast of a slowdown in US shale oil production the latest of which is a suggestion by a pioneer of the US shale oil industry like Continental Resources’ Harold Hamm that growth in US shale oil production could decline by as much as 50% this year compared to 2018. Also a report from the world’s largest oilfield services company ‘Schlumberger’ says that the slowdown in shale drilling activity is creating uncertain outlook for US shale oil output in 2019.

    Still, there will also be one bearish element at play this year. It is the realization by the global oil market that US sanctions have so far failed to cost Iranian crude oil exports the loss of even a single barrel of oil thus discounting the possibility a supply deficit.

    Furthermore, The United States has no alternative but to renew the sanction waivers it granted to eight countries in November last year when they expire in May this year or issue new ones if only for the Trump administration to use them as a fig leaf to mask the fact that their zero exports option is out of reach and that the sanctions are doomed to fail.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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