Is The Oil Rally Dead In The Water?

U.S. West Texas Intermediate crude oil futures are trading only slightly lower for the week despite a steep sell-off on Thursday. After edging higher $3.97 over nine trading sessions, these gains were wiped out in just one day as prices plunged to their lowest level since June 18. The catalyst for the plunge in prices was the announcement of additional tariffs on China by the United States. The news came as a surprise since the two economic powerhouses had just ended its first round of renewed trade negotiations after earlier talks broke off in early May.

New Tariffs Raise Concerns about Demand

Crude oil plunged on Thursday after President Donald Trump said he would impose an additional 10% tariff on Chinese imports to the U.S.

Trump said in a series of tweets the tariff will be imposed on $300 billion worth of Chinese goods. The levy will take effect September 1. He added later in the day those levies could go up to 25%. Trump's comments came after a U.S. delegation met with Chinese trade officials earlier this week.

This news should have an impact on demand. Furthermore, the market could take another hit if there are countermeasures from China.

Weak U.S. Factory Output

In other news pointing to lower demand, U.S. manufacturing activity slipped last month, dropping to a near three-year low, and construction spending fell in June as investment in private construction projects tumbled to its lowest level in 1-1/2 years.

ISM Manufacturing PMI came in at 51.2, down from 51.7 and below the 52.0 forecast. Construction Spending fell 1.3%. Traders were looking for a 0.5% increase. The previous month was revised higher to 0.5%.

U.S. Energy Information Administration Weekly Report

Earlier in the week, the U.S. Energy Information Administration (EIA) showed another larger-than-expected drawdown. However, this was somewhat offset by a slight increase in U.S. crude production during the week-ending July 26. Nonetheless, prices still rose on the news.

According to the EIA, U.S. crude oil production averaged 12.2 million barrels per day (bpd) last week, up by 900,000 bpd from the previous week and up by about 1.3 million bpd year on year.

Fed Rate Cut Provided Short-term Boost

Earlier in the week, crude oil prices were underpinned by expectations of a 25-basis point rate cut by the U.S. Federal Reserve. The Fed did cut its benchmark rate as widely expected, but Chairman Jerome Powell failed to acknowledge further rate cuts were imminent in September and December. He didn't say the Fed wouldn't cut rates, but described the current rate cut as "insurance" against a weakening economy. Nonetheless, crude oil weakened on the news.

After Trump announced the new tariffs, U.S. Treasury yields plummeted to a three-year low as financial market traders fully-priced in a rate cut for September. Once the markets settle down, this news could be supportive for crude oil prices because it will mean the Fed is serious about doing all it can to protect the current economic expansion.

Iran, Russia Planning Joint Naval Drill in Mid East Hot Spot

Russia and Iran are planning a joint naval exercise scheduled within the next year, commander of Iran's Navy, Rear Admiral Hossein Khanzadi announced Monday, according to state media. According to a report, the exercise will take place in March 2020 in the Indian Ocean and may extend to the Strait of Hormuz.

"A coordination meeting will be held between the two sides in this regard," he said while on a three day visit to Russia. "When we speak of the Indian Ocean, perhaps the most important part of which is the northern region where it's linked to the Sea of Oman, the Strait of Hormuz and also the Persian Gulf," Khanzadi said from Saint Petersburg.

This news is not expected to have an impact on prices over the near-term but it could be something to watch early next year especially after the recent escalation of tensions in the region. In July, the U.S. Navy claimed it shot down an Iranian drone, and Iran seized a British-flagged oil tanker.

Technical Analysis

September West Texas Intermediate Crude Oil Technical Analysis

The main trend is down according to the weekly swing chart. A trade through $61.02 will change the main trend to up. This is followed by additional main top targets at $64.20 and $65.92. The latter is the true trigger point for an acceleration to the upside.

A trade through $50.91 will signal a resumption of the downtrend after eight weeks of rangebound and counter-trend trading. This bottom is also a trigger point for an acceleration to the downside with the next major target the main bottom at $44.66.

The main range is $74.44 to $44.66. Its 50% to 61.8% retracement zone at $59.55 to $63.06 is resistance. Trading below this zone will help maintain the downside bias.

The minor range is $44.66 to $65.92. Its retracement zone at $55.29 to $52.78 is potential support. This zone was tested successfully this week. Holding above this zone may be an indication that counter-trend buyers are defending the main bottom at $50.91.

Weekly Forecast

Based on this week's price action, the direction of the September WTI crude oil market this week is likely to be determined by trader reaction to the short-term 50% level at $55.29.

Bullish Scenario

A sustained move over $55.29 will indicate the presence of buyers. If this move creates enough upside momentum then buyers may take a run at the main 50% level at $59.55. Overtaking this level will put the market in a position to take out $61.02 and change the main trend to up.

Bearish Scenario

A sustained move under $55.20 will signal the presence of sellers. This could trigger a break into the short-term Fibonacci level at $52.78. Buyers could come in on the first test of this level, but if it fails then look for the selling to extend into the main bottom at $50.91.

Look for an acceleration to the downside if $50.91 fails as support. The weekly chart indicates there is no major support until $44.66.