Chapter 3 09/20 WTI: Structural Adjustment May Be Inevitable as Decline Meets Expectations
Abstract: Before the announcement of the Federal Reserve's interest rate decision, both U.S. and Brent oil fell more than 1% today. The crude oil market is seriously overbought, and profit-taking is expected to continue. Rumors that WTI crude oil will rise to US$100 a barrel continue to heat up, but we don't believe this situation will continue.
Fundamentals
From the low in June to the high on Tuesday, WTI crude oil rose by nearly 27%. The speed at which oil prices rose surprised the market. Nevertheless, we don't believe that this situation will last.
On Tuesday, the market brought WTI crude oil up to US$92.26 to an abrupt end, causing oil prices to fall. For several days, from a technical point of view, WTI crude oil prices have been overbought, which indicates that oil prices may have climbed to a 10-month high. Although the rise in oil prices has rekindled the discussion that the market may return to US$100.00, it may be a headache for central bank officials, including Fed officials who decide their policies later.
Our basic forecast is that WTI crude oil will not continue to exceed US$100.00 per barrel in the next 12 months, because this may lead the U.S. crude oil producers to increase production and weaken demand growth next year. However, we believe that in the next few months, strong fundamentals will support WTI crude oil to fluctuate around the current level, that is, within the range of US$90.00-100.00. In addition, we keep the year-end target of US$95.00 per barrel unchanged, because the widely tracked supply and demand indicators have strengthened the signal of market tightening. In addition, the time difference keeps a strong tone. The spread between the two closest December contracts of WTI crude oil is slightly lower than US$10 per barrel, which is a bullish spot and futures structure, more than twice that of a month ago.
For other aspects, although data released by the American Petroleum Institute earlier today showed that U.S. crude oil inventories fell by 5.3 million barrels last week, which was higher than expected, oil prices still fell. The official EIA data will be released tonight, and the market needs to wait patiently for the information revealed by this data.
At the same time, crude oil traders may make more profit-taking before the much-anticipated decision of the Federal Open Market Committee, as the Federal Reserve is expected to raise interest rates while maintaining the possibility of further interest rate hikes. In this case, risk aversion may return to the market, and the fear of economic recession will stimulate a sharp drop in crude oil prices.
Technical Analysis
WTI crude oil showed a sharp correction in yesterday's trading because the upward momentum stalled and fell from a 10-month high of US$92.26. However, Fibonacci retracement tools show that more buyers may be waiting to buy at a staged low.
The 38.2% Fibonacci level at US$87.11 is in line with the 100 SMA dynamic inflection point. A sharper pullback could reach the 50% Fibonacci level close to the former resistance area or the 61.8% level in line with the 200 SMA and the uptrend line that has held since July this year.
If any of these levels can control the downward trend, crude oil may resume climbing to yesterday's high or higher. Technical indicators show that the upward trend may continue after hitting the Fibonacci level.
The 100 SMA is higher than the 200 SMA, indicating that the path of least resistance is to the upside, or that support is more likely to hold than be broken. The gap between the SMAs is even widening, reflecting increased upside momentum.
However, stochastics are now falling to reflect the presence of selling pressure. The Oscillator is approaching the oversold zone, suggesting short-term exhaustion on the part of the bears. However, the Relative Strength Index has more room to fall before it reaches the oversold zone; therefore, the adjustment will likely continue until it reaches the oversold zone. It is recommended to buy the dips.
Trading Recommendations
Trading direction: Long
Entry price: 88.40
Target price: 93.40
Stop loss: 87.20
Deadline: 2023-10-04 23:55:00
Support: 88.61, 88.22, 87.72
Resistance: 90.50, 91.26, 92.26
