Will Oil Prices Break Support Levels?

Crude Oil futures are in a position to post a huge loss this week on renewed concerns over the global supply glut and as investors continued to express doubts that OPEC would be able to rally its members and a few key non-members to reach an agreement to reduce production.

The week began with talks in Vienna over the weekend, ending with participants failing to make it clear how much each individual member should cut. This meant that the regular OPEC meeting on November 30 will begin with virtually no chance for the cartel to come to an agreement about reducing production cuts.

Prices were hit again at mid-week after the U.S. Energy Information Administration (EIA) said crude inventories rose by 14.4 million barrels for the week ended October 28. Analysts were looking for a build of 1 million barrels. It was the biggest ever rise in U.S. crude stocks in a week, beating a 2012 record.

The crude oil market was under pressure for a sixth straight day on Friday after Reuters reported Saudi Arabia threatened to raise oil output steeply to bring prices down if Iran refuses to limit its supply.

December West Texas Intermediate Crude Oil

(Click to enlarge)

Technical Analysis

The main trend is up according to the daily swing chart. However, momentum is clearly to the downside. This week's price action has also made $52.22 a new main top.

A trade through $43.77 will turn the main trend to down. This could create enough downside momentum to challenge another main bottom at $41.58. This is followed by $39.70.

The main range is $34.06 to $53.62. Its retracement zone at $43.84 to $41.53 is the primary downside target. This zone is controlling the longer-term direction of the market. Crossing the upper or 50% level at $43.84 will be the first sign of weakness. This could create the downside momentum needed to test the lower or Fibonacci level at $41.53.

Crossing to the weak side of the entire retracement zone will be a strong sign that this market is headed lower.

Another key level to watch is $43.83. This is the December 31, 2015 close. If this level fails as support then the market will turn lower for the year.

Gann angle analysis is also suggesting that prices are heading lower. The key angle to watch next week comes in at $44.56. A sustained move under this angle will indicate the selling pressure is getting stronger. The next target angle under this price comes in at $39.31.

Summary

All three major technical analysis tools - the trend indicator, retracement levels and Gann angles - all suggest that crude oil prices are headed lower next week.

Combining all three next week and looking at them in order of importance, we see that an early downside bias will begin with a break under the uptrending angle at $44.56. This could generate enough downside momentum to challenge a key 50% level at $43.84 and the December 31, 2015 close at $43.83. This is followed closely by the main bottom at $43.77.

The main bottom at $43.77 is the trigger point for an acceleration to the downside with the next major area a potential support cluster at $41.58 to $41.53. This is another trigger point for an acceleration into the main bottom at $39.70.

Last week's price action shows that the entire rally triggered by OPEC's September 28 announcement that it would cut production has been erased. This means that traders and investors believe that the chances for a deal have been eliminated.

Because of this, crude oil is not likely to rally unless OPEC makes another convincing announcement that the deal is back on. Otherwise, the next chance for a meaningful rally is not likely to occur until OPEC's next official meeting on November 30.