Crude Oil on Verge of Breaking Lower

Market Trends - 10/03/2015

After spending the last month rebounding higher, the energy complex might be preparing to reconnect with the fundamental outlook. Oversupply issues remain front and center with today’s API Crude Stocks figure likely to point to a continued build in inventories. As Goldman Sachs has cited in recent research, poor weather conditions across the United States in the last few months are likely to see inventories underreported as a result. The massive builds in inventories and breakneck pace at which troubled firms are pumping in the shale patch are contributing to further downside pressure on prices. On strictly an economics basis, with demand staying constant and the supply curve shifting out towards the right, equilibrium prices should continue dropping until the point at which quantity demanded increases to the point of soaking up excess supply. Aside from the fundamental rationale for prices to sink lower from present levels is the recent break of crucial technical levels.

Brent crude oil which is the benchmark for almost two-thirds of the world’s traded oil recently fell below important support sitting at $57.75 as the spread between the prices of WTI and Brent narrows. Besides reversing lower from the near-term uptrend that formed over the course of February, the break below support is further confirmation needed to ascertain that prices are in the process of resuming the plunge. Apart from the technical features, the rising dollar valuation is pressuring prices further as most crude benchmarks remain dollar denominated with the US still maintaining the distinction of the globes largest source of energy demand. Should the spread between the two energy benchmarks, Brent and WTI, close further towards parity which was seen back several months, the optimal strategy once more will be a pair trade. In this scenario, WTI is sold and an equivalent amount of Brent is bought with the expectation that the spread between the two benchmarks will widen to more historical norms of $8-10.


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