Oil Markets Tumble On New Lockdown Measures

U.S. West Texas Intermediate crude oil futures are edging lower on Friday as traders try to consolidate prices after another week and month of losses. The current price action indicates that chart-watchers are recognizing the importance of a key 50% to 61.8% retracement zone of the entire late-April to late-August rally.

Does this week's price action mean the selling is out of control? No. All we can surmise is that the fundamentals have worsened enough since about August 26 to take away about half of the entire rally from April.

Since that high was reached, we've seen U.S. stimulus funds evaporate as fiscal coronavirus aid expire, the end of the U.S. driving season, increased U.S. production, a failure to pass new fiscal stimulus legislation, increased production from Libya, OPEC+'s plan to continue to reduce its production cuts and a resurgence of the coronavirus in the United States, Europe, and Russia.

Given all that bearish news, traders really had no choice but to liquidate longs or go short since nearly all of the reasons to stay long had evaporated.

Weekly Technical Analysis

Weekly December WTI Crude Oil

Trend Indicator Analysis

The main trend is down according to the weekly swing chart. The trend turned down on Thursday when sellers took out the last swing bottom at $36.93. A trade through $41.90 will change the main trend to up.

The main range is $59.51 to $25.31. Its retracement zone at $42.41 to $46.45 proved to be solid resistance, stopping the rally at $44.33 the week-ending August 28.

The short-term range is $25.31 to $44.33. Its retracement zone at $34.82 to $32.58 is the primary downside target. We should find out over the near-term if buyers also view this area as a value zone. Trader reaction to this zone should determine the near-term direction of the market.

Weekly Technical Forecast

Based on this week's price action, the direction of the December WTI crude oil market the week-ending November 6 should be determined by trader reaction to the short-term 50% level at $34.82.

Bullish Scenario

A sustained move over $34.82 will indicate the return of buyers. If this move creates enough upside momentum then look for a quick counter-trend rally into $38.41, followed by the main top at $41.90 and the main 50% level at $42.41.

Bearish Scenario

A sustained move under $34.82 will signal the presence of sellers. If this move generates enough downside momentum then look for the selling to possibly extend into the short-term Fibonacci level at $32.58. This price is a potential trigger point for an acceleration to the downside.

Short-Term Outlook

Governments around the free world tried to stop the spread of the virus by telling their citizens to wear masks, practice social distancing, avoid crowded areas and to test frequently. While these "requests" were being followed, oil traders began to bet on a steady demand recovery. But the plans blew up as people took matters into their own hands, leading to a resurgence in the pandemic.

With cases rapidly rising around the world and threatening the global demand recovery, bullish speculators had no choice but to liquidate their long positions. There is uncertainty over when demand will return, and when traders see uncertainty, they sell their positions and move to cash or other protective assets. Some even shorted the market.

So is the market out of control? No, it is not. The selling has been orderly and there are sound reasons behind it.

But since it looks as if the pandemic will get worse before it gets better, no one really has control over demand. So the only choice is to work on the supply. That could mean lowering production in the United States, OPEC+ telling Libya to lighten up on production, or OPEC and its allies including Russia postponing plans to raise their output by 2 million bpd in January. Saudi Arabia and Russia are in favor of maintaining the group's output reduction of about 7.7 million bpd currently into next year. If they start to push this agenda then prices may stabilize.

Technically, what this means is investors will be looking for value on this break. No one is in the mood at this time to chase the market higher. Even if there was a quick turnaround in the market, it would likely be fueled by short-covering, which means the move will likely be met with a fresh round of shorting pressure.

Trader reaction to $34.82 to $32.58 will tell us if this market has a chance to resume the rally. This is the value zone in my opinion. We'll know if buyers are returning if a support base begins to form in this area. However, even if there is consolidation, the market is not likely to rally unless OPEC+ decides to postpone its planned reduction in production cuts.

No one knows how much pain OPEC+ will be willing to take so traders have to be prepared for a possible acceleration to the downside under $32.58.

Nonetheless, OPEC+ started the rally when it announced the reduction cuts in late April when no one really knew how the pandemic would pan out. The same conditions exist at this time with the resurgence of the pandemic, so I expect OPEC and its allies to take a page from their playbook and announce a move that will stop crude oil from free-falling.