Chapter 25 09/06 WTI: What Will Happen When the Market Has Digested Expectations?
Abstract: Saudi Arabia announced a new round of production cuts, which pushed crude oil prices soaring and seemed to be out of market correlation, which increased the risk of a pullback.
Fundamentals
Saudi Arabia always likes to surprise the crude oil market. With the extension of supply cuts in Saudi Arabia, it has once again injected vitality into the market, and the momentum of further oil price increase seems to be "taking shape".
Earlier, market observers predicted that Saudi Arabia would extend the production restriction of 1 million barrels per day implemented this summer to October. Surprisingly, however, Saudi Arabia promised on Tuesday that it would continue to implement the reduction measures, not just for one month, but until the end of this year. For a time, international crude oil soared in the short term.
The question now is, will US$100 be back on the table? This is uncertain, and the road leading to the psychological barrier of crude oil price of US$100 may be bumpy because the rise in energy prices has begun to be reflected in inflation and inflation expectations. Therefore, central banks, including the Federal Reserve, have no choice but to keep monetary policy tight enough to prevent inflation from rising. This may mean raising interest rates further or keeping interest rates at a restrictive level for a longer period. In this case, oil prices may turn lower due to economic recession and global demand concerns.
When global demand concerns intensify and prices fall, Saudi Arabia will lose money considering that it is solely responsible for OPEC's production reduction strategy. At present, despite the economic slowdown in China and the heavy losses in Europe, the demand outlook is still strong; However, if the demand outlook is weak, Saudi Arabia can easily change its mind, and Saudi Arabia has a history of suddenly changing its decision when the wind is unfavorable.
Overall, Saudi Arabia and Russia are in step with each other in extending the production reduction period, which shows the determination of OPEC+ to manage crude oil production, and the crude oil supply will continue to be tight in the short term. On the one hand, the Federal Reserve and the European Central Bank (ECB) will maintain high interest rates for a longer period, which will have a negative impact on global economic growth; On the other hand, the U.S. may hedge OPEC+'s production reduction measures by relaxing sanctions on Iranian and Venezuelan oil exports. Based on the comprehensive judgment, oil prices will fluctuate at a high level in the short term.
Technical Analysis
On Tuesday, WTI crude oil continued to fall from yesterday's high of US$87.55, as investors digested the news that Saudi Arabia and Russia decided to extend supply restrictions until the end of the year.
During the European session, after German economic data showed weakness, risky assets were generally on the defensive. The strategy of Saudi Arabia and Russia aims to further consume inventory and push the potential price difference in the market into a deeper spot premium, which is a bullish pricing model. However, in the short term, the relative strength index of WTI crude oil issued an overbought warning, which increased the risk of a pullback.
Fibonacci retracement tools show that more bears may be waiting for a pullback. 38.2% level is at US$85.50, while the 50% Fibonacci level is consistent with the dynamic support level of 100 SMA at US$84.70. A larger pullback may reach 61.8%, close to US$84.00 and the uptrend line.
However, in the short term, 100 SMA higher than 200 SMA indicates that the path of least resistance is upward, or the upward trend is more likely to gain traction rather than reverse. If any Fibonacci retracement can be used as a support, WTI crude oil may return to yesterday's fluctuating high point or create a new high point.
Nonetheless, stochastic is moving down from the overbought zone, suggesting selling pressure is at play, and the oscillator has room to move lower before reflecting seller exhaustion, suggesting bearish momentum is now working. It is recommended to go short at the highs.
Trading Recommendations
Trading direction: Short
Entry price: 86.80
Target price: 79.30
Stop loss: 89.70
Deadline: 2023-09-19 23:55:00
Support: 84.50, 84.23, 83.30
Resistance: 87.55, 87.78, 88.06
