The crude oil futures market is set to finish October sharply lower, however, the consolidation chart pattern on the daily chart suggests the market may be oversaturated with short contracts, setting up the market for a potential short-covering rally in early November.
Looking at the monthly crude oil continuous contract chart, one can see that the market is trading slightly below the mid-point of its five year range. The low in 2009 was $63.63, making a range with the May 2011 top at $115.70. The mid-point of this range is $89.67. This price is controlling the direction of the market at this time. Look for a downside bias as long as crude oil remains below this level.
October’s low at $79.03 brought in enough buyers to produce a little short-covering the last two weeks of the month, suggesting oversold conditions. In addition, hedge fund managers and professional buyers may have also been reluctant to sell into a pair of bottoms at $78.75, $74.06 and the main bottom at $63.63.
This selling pressure may come during the first quarter in 2015, but the fundamentals are going to have to reflect a drastic increase in supply or decrease in demand. At this time it seems traders have become comfortable enough with the supply/demand situation to slow down the pace of the selling pressure.
At this time, no one expects a huge recovery in crude oil prices, but there are signs of consolidation taking place on the daily chart. Since the U.S., Russia and Saudi Arabia continue to overproduce, there should be ample supply around. Demand is questionable at this time because even the U.S. Federal Reserve has expressed concerns about the sputtering Euro Zone’s negative influence on U.S. growth. China’s growth numbers haven’t been impressive either.
Since the U.S. is not expected to cut back on production and Russia is expected to continue to sell oil to raise cash since the European sanctions have taken away its ability to borrow, the only concern for bearish traders is a potential cut in production by Saudi Arabia and the rest of the OPEC members.
Instead of cutting production to support prices, Saudi Arabia, Kuwait, Iran and Iraq decided on price cuts to Asia in an effort to increase demand. This action corresponded with the low in crude oil at $79.10 on October 16. There is no question that traders will be monitoring the activity by OPEC members during November ahead of its big meeting. So far there is no evidence of a price war and its members seem to be managing fine with crude oil at $80.00.
We’ll see over the next few weeks if the price cuts are enough to stabilize prices. If $80.00 fails to sustain this market then look for OPEC members to take matters into their own hands. This could mean the scrapping of the price cuts in favor of production cuts.
Another Thing to Consider ……
In a side note, this week featured a number of strangely timed articles and reports such as Bloomberg’s “Why Oil Prices Went Down So Far So Fast”, or the Goldman Sachs report stating that Brent crude could go down to $80 by mid-2015. Previous reports by Goldman Sachs had oil going to $100. Six-years ago, they were calling for $200 WTI crude. Contrarian Theory has me thinking that the market may be ripe for a reasonable short-covering rally. The recent fast 10% increase in the energy ETF S&P Select Energy Spyder Fund (XLE) may also be an indication that short sellers are getting ready to take profits and that the bears are getting ready to take a short-term break from pressing this market.