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.
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.
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.